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Please explain the answer of the problem 1. Suppose that a bond has a face value of $1,000, a coupon rate of 8% and a
Please explain the answer of the problem
1. Suppose that a bond has a face value of $1,000, a coupon rate of 8% and a maturity of two years. The bond makes semi-annual coupon payments, and the yield to maturity is 6%. What is the bond's price? Answer: Period 1 = Coupon = 1,000x0.08/2 = 40 Period 2 = Coupon = 1,000x0.08/2 = 40 Period 3 = Coupon = 1,000x0.08/2 = 40 Period 4 = Coupon + Face value = 1,000x0.08/2 + 1,000 = 1,140 Interest per period = 0.06/2 = 0.03 or 3% Present value of above payments = 40=(1+0.03) + 40:(1+0.03)^2 + 40=(1+0.03)^3 + 1040=(1+0.03)^4 = 38.83 + 37.70 + 36.61 + 924.03 = 1,037.17 Bond price= $1,037.17Step by Step Solution
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