Moving to the next question prevents changes to this answer

Moving to the next question prevents changes to this answer. uestion 18 What will be the fair market price of a five-year, S 1,000 par value bond that makes semi-annual payments, has a coupon rate of 8 %, and offers a yield to maturity of 7%? a. $ 1,127.14 Ob.$1,041.58 c. $ 950.00 Od. $1,058.91 Moving to the next question prevents changes to this answer.

Solution

The correct answer is b. $ 1041.58

The fair market value of the bond is calculated as follows

Price = Coupon payment * PVIFA_{r/2 , 2n} + Maturity value * PVIF _{r/2 , 2n}  

semi- annual Coupon payment = ( 8% / 2 ) * $ 1000

semi- annual Coupon payment = 0.04 * $ 1000

semi- annual Coupon payment = $ 40

Price = $ 40 * PVIFA_{3.5% , 10 years} + $ 1000 * PVIF_{3.5% , 10 years}

Price = $ 40 * 8.316605 + $ 1000 * 0.708919

Price = $ 1041.58