Answer:
Market price of bond is 1,088.03
Explanation:
Price of bond is the present value of all future cash flows, Present value of all of all coupon payments and face value is calculated and added together to find the value of the bond.
As the interest is paid semiannually the calculations are made accordingly.
Coupon payment = 1000 x 8.45% = $84.5 annually = $42.25 semiannually
Number of periods = n = 10 years x 2 = 20 periods
Yield to maturity = 7.2% annually = 3.6% semiannually
To calculate Price of the bond use following formula
Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]
Price of the Bond =$42.25 x [ ( 1 - ( 1 + 3.6% )^-20 ) / 3.6% ] + [ $1,000 / ( 1 + 3.6% )^20 ]
Price of the Bond =$42.25 x [ ( 1 - ( 1.036 )^-20 ) / 0.036 ] + [ $1,000 / ( 1.036 )^20 ]
Price of the Bond =$42.25 x [ ( 1 - ( 1.036 )^-20 ) / 0.036 ] + [ $1,000 / ( 1.036 )^20 ]
Price of the Bond = $595.08 + 492.95 = 1,088.03
