Question

You have just purchased a 10-year, $1,000 par value bond. The coupon de un annually, with interest being paid semiannually. If you expect to earn a 10 percent rate of return (YTM) on this bond, how much did you pay for it? $1,122.87 O $1,003,42 $1,003.42 $875.38 $950.75 $812.15

Answer 1

Answer: Given Data , Annuai Interest Rate   = 8%                              Bond Par value           = $1,000 Semi annual rate of retun                  =   10% / 2    = 5% Number of periods                               =   10 x 2   = 20 Semi-Annual interest Coupon amount     = $1,000 x 8%/2                                                                                     = $40

Value of bond =   Coupon amount x PVAF (5% , 20) + Bond value x PVF(5%,20 years)                                = ($40   x 12.462)    +   ($1000 x 0.3769)                                = $498.48   + $376.90                                = $875.38

Value of bond   = $875.38

From given options, option ( c ) is correct i.e., $875.38