Answer :
Answer:
The Price of this bond is $1,044.57
Explanation:
Price of the bond is the present value of all cash flows of the bond. These cash flows include the coupon payment and the maturity payment of the bond. Both of these cash flows discounted and added to calculate the value of the bond.
According to given data
Face value of the bond is $1,000
Coupon payment = C = $1,000 x 8% = $80 annually = $40 semiannually
Number of periods = n = 15 years x 2 = 30 period
Market Rate = 7.5% annually = 3.75% semiannually
Price of the bond is calculated by following formula:
Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]
Price of the Bond = 40 x [ ( 1 - ( 1 + 3.75% )^-30 ) / 3.75% ] + [ $1,000 / ( 1 + 3.75% )^30 ]
Price of the Bond = $713.17 + $331.40 = $1,044.57
Answer:
The price that bond is trading for is closest to $1,044.57
Explanation:
The price of the bond can be computed using the present value formula in excel which is given as =pv(rate,nper,pmt,fv)
rate is the yield to maturity of 7.5% divided by 2 since the bond is a semi-annual interest paying bond
nper is the year to maturity multiplied by 2 i.e 15*2=30
pmt is the semi-annual interest payable by the bond i.e 8%/2*$1000=$40
fv is the future value of the bond at redemption which is $1000
=pv(3.75%,30,40,1000)
pv= $1,044.57