Answer:
Expected selling price =$ 1,271.81
Explanation:
<em>The price of a bond is the present value (PV) of the future cash inflows expected from the bond discounted using the yield to maturity.</em>
<em>These cash flows include interest payment and redemption value</em>
The price of the bond can be calculated as follows:
Step 1
<em>PV of interest payment</em>
coupon rate - 12%, yield - 8%, years to maturity- 10 years
Semi-annual coupon rate = 12%/2 = 6%
Semi-annual Interest payment =( 6%×$1000)= $60
Semi annual yield = 8%/2 = 4%
PV of interest payment
= A ×(1- (1+r)^(-n))/r
A- interest payment, r- yield - 4%, n- no of periods- 2 × 10 = 20periods
= 60× (1-(1.04)^(-10×2))/0.04)
= 60× 13.59032634
=$815.41
Step 2
<em>PV of redemption value (RV)</em>
PV = RV × (1+r)^(-n)
RV - redemption value- $1000, n- 2×10 r- 4%
= 1,000 × (1+0.04)^(-2×10)
= $456.38
Step 3
<em>Price of bond = PV of interest payment + PV of RV</em>
= $815.41 + $456.38
= $ 1,271.81
Expected selling price =$ 1,271.81
