An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is five percent, what is the current market value of the bond?

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An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is five percent, what is the current market value of the bond?

The correct answer is b

answer; institution based;

Bond Price = $828.4091365 rounded off to $828.41

Explanation:

To calculate the price of the bond today, we will use the formula for the price of the bond. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,

Coupon Payment (C) = 40

Total periods (n) = 20 * 2 = 40

r or YTM = 0.05 or 5%

The formula to calculate the price of the bonds today is attached.

Bond Price = 40 * [( 1 - (1+0.05)^-40) / 0.05] + 1000 / (1+0.05)^40

Bond Price = $828.4091365 rounded off to $828.41

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