A bond with a face value of $1,600 pays half-yearly interest at a rate of 8% pa compounded half-yearly and has 6 years until maturity

Accounting Feb 23, 2021

A bond with a face value of $1,600 pays half-yearly interest at a rate of 8% pa compounded half-yearly and has 6 years until maturity. The next interest payment is due in exactly one half-year. Calculate the price (P) required to yield 3% pa compounded half-yearly. Give your answer in dollars and cents to the nearest cent.

Expert Solution

Computation of Current Bond's Price using PV Function in Excel:

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

Here,
PV = Current Bond Price = ?

Rate = 3%/2 = 1.5% compounded semiannually

Nper = 6 years * 2 = 12 periods

PMT = $1,600*8%/2 = $64

FV = $1,600

Substituting the values in formula:

=-pv(1.5%,12,64,1600)

PV or Current Bond's Price = $2,036.30

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