Consider a bond (with par values $1,000) paying a coupon rate of 9% per year sem

Question

Consider a bond (with par values $1,000) paying a coupon rate of 9% per year semiannually when the market interest rate is only 7% per half-year. The bond has three years until maturity. a. Find the bond's price today and six months from now after the next coupon is paid. (Round your answers to 2 decimal places.) Current price Price after six months b. What is the total (six-month) rate of return on the bond? (Do not round intermediate calculetions. Round your answer to the nearest whole percent.) t 15] Rate of return

Explanation / Answer

a) FV 1000 PMT 45 (1000 x 9%/2) NPER 6 (3 x 2) Rate 7% per period of half year PV ($880.84) =PV(7%,6,45,1000) So price of bond currently is $880.84 After 6 months FV 1000 PMT 45 (1000 x 9%/2) NPER 5 (2.5 x 2) Rate 7% per period of half year PV ($897.50) =PV(7%,5,45,1000) So price of bond after 6 month is $897.50 b) Rate of return = [45 +(897.50-880.84)] ÷ 880.84 (45+ 16.66) ÷ 880.84 7% per six month

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