Asked by Maricarmen Fierros on Jul 03, 2024
Verified
Riordan Inc. has a bond outstanding that has a $1,000 par value, semiannual coupon rate of 4% and a current yield of 7.9%. What is the price of the bond? (Round to nearest $)
A) $605
B) $867
C) $1,013
D) $1,152
E) $1,457
Semiannual Coupon Rate
The interest rate on a bond or fixed-income security that is paid out to investors twice a year.
Current Yield
This term denotes the annual income (interest or dividends) divided by the current price of the security, often used in reference to bonds.
Par Value
The face value of a bond or the stock value stated in the corporate charter, which is often different from its market value.
- Determine the price of a bond based on its coupon rate, market rate, and time to maturity.
Verified Answer
RD
Rohit DhendeJul 07, 2024
Final Answer :
C
Explanation :
The bond pays a semiannual coupon of 4% of $1,000 or $40 per year ($20 every six months). The current yield is 7.9%, so the annual coupon payment of $40 represents 7.9% of the bond price. Setting up an equation:
$40 / 0.079 = x, where x is the bond price
x = $506.33 (the present value of the semiannual payments)
However, because the bond has a $1,000 par value, there are two semiannual payments per year, so we need to double the present value:
$506.33 x 2 = $1,012.66
Rounding to the nearest dollar gives us the answer of $1,013. Therefore, the correct answer is Choice C.
$40 / 0.079 = x, where x is the bond price
x = $506.33 (the present value of the semiannual payments)
However, because the bond has a $1,000 par value, there are two semiannual payments per year, so we need to double the present value:
$506.33 x 2 = $1,012.66
Rounding to the nearest dollar gives us the answer of $1,013. Therefore, the correct answer is Choice C.
Learning Objectives
- Determine the price of a bond based on its coupon rate, market rate, and time to maturity.