The price of the bond is computed as shown below:
The coupon payment is computed as follows:
= Coupon rate / 2 x $ 1,000 (Since the payments are semi annual hence divided by 2)
= 8.6% / 2 x $ 1,000
= $ 43
The YTM is computed as follows:
= 12% / 2 (Since the payments are semi annual hence divided by 2)
= 6% or 0.06
The n is computed as follows:
= 5 x 2 (Since the payments are semi annual hence multiplied by 2)
= 10
So, the price of the bond will be as follows:
= $ 43 / 1.06^{1} + $ 43 / 1.06^{2} + $ 43 / 1.06^{3} + $ 43 / 1.06^{4} + $ 43 / 1.06^{5} + $ 43 / 1.06^{6} + $ 43 / 1.06^{7} + $ 43 / 1.06^{8} + $ 43 / 1.06^{9} + $ 43 / 1.06^{10} + $ 1,000 / 1.06^{10}
= $ 874.88 Approximately
Feel free to ask in case of any query relating to this question
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