Consider a bond (with par value = $1,000) paying a coupon rate of 7% per year se

Question

Consider a bond (with par value = $1,000) paying a coupon rate of 7% per year semiannually when the market interest rate is only 6% 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 calculations. Round your answer to the nearest whole percent.) Rate of return

Explanation / Answer

Coupon Payment Semi Annually = 35

N = 6 half years

FV = 1,000

I = 6%

Using Financial Calculator:

PV = 877.07

Current Price = 877.07

After six months, price will be

Coupon Payment Semi Annually = 35

N = 5 half years

FV = 1,000

I = 6%

Using Financial Calculator:

PV = 894.69

Price after 6 months = 894.69

Part B

Rate of Return = (35 + 894.69 - 877.07)/ 877.07

Rate of Return = 6%

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