Question

Bill Mitselfik has purchased a bond that was issued by Acme Chemical. This bond has a face value of $1,000 and pays a dividend of 4% per year, compounded semi-annually. Bill bought the bond five years ago at face value and there are six years remaining until the bond matures. Bill wishes to sell it now for a price that will result in Bill earning an annual yield of 6% compounded semi-annually. What price does Bill need to sell the bond for to earn his desired return? The selling price of the bond should be $ . (Round to the nearest dollar.)

Answer 1

Solution:-

Semi-annual bond dividend = $1,000 x 4% x (1/2) = $20

Number of semi-annual periods till maturity = 2 x 6 = 12

Semi-annual yield = 6% x (1/2) = 3%

Bond price ($) = PV of bond dividend + PV of face value

                       = 20 x P/A (3%, 12) + 1,000 x P/F(3%, 12)

                       = 20 x 9.954 + 1,000 x 0.7014

                       = 199.08 + 701.4

                       = 900.48