Question

The yield to maturity of a $ 1 comma 000 bond with a 6.9 % coupon​ rate, semiannual​ coupons, and two years to maturity is 7.7 % ​APR, compounded semiannually. What is its​ price?

Answer 1

The price of the bond is computed as shown below:

Coupon rate = 6.9% / 2 (Since the coupons are semiannual, hence divided by 2 )

= 3.45%

Coupon payments = $1,000 x 3.45%

= $ 34.5

Yield to maturity = 7.7% / 2 ( Since the coupons are semiannual, hence divided by 2 )

= 3.85%

n = 2 x 2 = 4 ( Since the coupons are semiannual, hence multiplied by 2 )

Price = $ 34.5 / 1.0385¹ + $ 34.5 / 1.0385² + $ 34.5 / 1.0385³ + $ 34.5 / 1.0385⁴ + $ 1,000 / 1.0385⁴

= $ 985.43 Approximately

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