Calculate the price of a bond originally issued six years ago that pays semiannual interest at the rate of 12 percent and matures in seven years at $1,900

Finance Oct 08, 2020

Calculate the price of a bond originally issued six years ago that pays semiannual interest at the rate of 12 percent and matures in seven years at $1,900. The market currently requires an 8 percent return for a bond of this risk.

Expert Solution

We can calculate the price of the bond by using the following formula in excel:-

=-pv(rate,nper,pmt,fv)

Here,

PV = Price of the bond

Rate = 8%/2 = 4% (semiannual)

Nper = (7-6)*2 = 2 periods (semiannual)

Pmt = Coupon payment = $1,000*12%/2 = $60

FV = $1,000

Substituting the values in formula:

= -pv(4%,2,60,1000)

= $1,037.72

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