Question

The market price of an $1,000,000, ten-year, 12% (pays interest semiannually) bond issue sold to yield an effective rate of 10% is:______
a. $1,124,623.
b. $1,872,360.
c. $1,122,890.
d. $1,133,270.

Answer 1

Answer:

Bond price= 1,124,622

Explanation:

Giving the following information:

Face value= $1,000,000

Number of periods= 10*2= 20

Cupon rate= 0.12/2= 0.06

YTM= 0.1/2= 0.05

To calculate the bond price, we need to use the following formula:

Bond Price​= cupon*{[1 - (1+i)^-n] / i} + [face value/(1+i)^n]

Bond Price​= 60,000*{[1 - (1.05^-20)] / 0.05} + [1,000,000 / 1.05^20]

Bond Price​= 747,732.62 + 376,889.48

Bond price= 1,124,622