A three-year bond has 8.0% coupon rate and face value of $1000. If the yield to maturity on the bond is 10%, calculate the price of the bond assuming that the bond makes semi-annual coupon interest payments.

Answer 1

The price of the bond is $943.20.

The formula for calculating the price of a bond is:
Price = (C x (1 - (1 + YTM/2)^-2N)) + (FV x (1 + YTM/2)^-2N)

Where:
C = Coupon rate
YTM = Yield to maturity
N = Number of periods
FV = Face value

In this case, C = 8.0%, YTM = 10%, N = 6 (3 years x 2 semi-annual payments), and FV = $1000.

Plugging these values into the formula, we get:
Price = (8.0% x (1 - (1 + 10%/2)^-12)) + ($1000 x (1 + 10%/2)^-12)
Price = (8.0% x (1 - 0.9756)) + ($1000 x 0.9756)
Price = (8.0% x 0.0244) + ($1000 x 0.9756)
Price = $19.52 + $973.68
Price = $993.20

The price of the bond is $943.20.