Knight, Inc., has issued a three-year bond that pays a coupon of 6.10 percent. Coupon payments are made semiannually. Given the market rate of interest of 5.80 percent, what is the market value of the bond?

Market Value of bond $1,008.15

Explanation:

Market Value 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. Price of the bond is calculated by following formula:

According to given data

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

Coupon payment = C = $1,000 x 6.1 = $61 annually = $30.5 semiannually

Number of periods = n = 2 x 3 years = 6 periods

Current Yield = r = 5.8% / 2 = 2.9% semiannually

Market Value of the Bond = $30.5 x [ (1 - (1 + 2.9%) ^-6) / 2.9% ] + [ $1,000 / (1 + 2.9%) ^6 ]

Market Value of the Bond = $30.5 x [ (1 - (1.029) ^-6) / 0.029 ] + [ $1,000 / (1.029) ^6 ]

Market Value of the Bond = $165.77 + $842.38 = $1,008.15