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Compute the price of a 3
Compute the price of a 3.8 percent coupon bond with 18 years left to maturity and a market interest rate of 7 percent
Assume interest payments are paid semi-annually and solve using semi-annual compounding.
Expert Solution
Computation of the price of the bond:-
Price of the bond = (Coupon payment * ((1 - 1 / ( 1 + r)^n) / r)) + (FV / ( 1 + r)^n)
Coupon payment = $1,000*3.8%/2 = $19
Rate = 7%/2 = 3.5% (semiannual)
n = 18*2 = 36 periods (semiannual)
Substituting the values in formula:
Price of the bond = ($19*((1-1/(1+3.5%)^36)/3.5%)) + ($1,000/(1+3.5%)^36)
= ($19*20.2905) + ($1,000/3.4503)
= $385.52 + $289.83
= $675.35
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