Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question

Transcribed Image Text:A 10 year bond was issued 3 years ago. It pays interest semi-annually at an annual
coupon rate of 5%. Current market conditions imply that the bond should yield
7.5%. What should the price be?
54.1
97.82
100.00
92.42
101.47
86.58
Expert Solution

Step 1
Bond:
It is a debt instrument issued by a firm to raise capital for expanding business operations. Therefore, the return paid by the firm to the bondholders is the minimum acceptable rate of return and the cost of capital for the firm.
The price of the bond is computed by discounting the coupon payments and the par value.
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