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11 November, 21:22

Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market will yield 12 percent. What will be the price that he will get for his bond

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  1. 11 November, 21:27
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    The price of the Bond is $937.9

    Explanation:

    Price of bond is the present value of future cash flows, The coupon payment and the face value are discounted separately and added together to make the price of the bond. To calculate Price of the bond use following formula

    Price of the Bond = C x [ (1 - (1 + r) ^-n) / r ] + [ F / (1 + r) ^n ]

    As the payments are made on semiannual basis so, all the calculation will be made accordingly

    Assuming Face value of the bond is $1,000.

    Coupon payment = 1000 x 10% = $100 annually = $50 semiannually

    Number of periods = n = 4 years x 2 = 8 periods

    Yield to maturity = 12% annually = 6% semiannually

    Price of the Bond = $50 x [ (1 - (1 + 6%) ^-8) / 6% ] + [ $1,000 / (1 + 6%) ^8 ]

    Price of the Bond = $50 x [ (1 - (1.06) ^-8) / 0.06 ] + [ $1,000 / (1.06) ^8 ]

    Price of the Bond = $310.49 + $627.41

    Price of the Bond = $937.9
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