Determine the Price of a Bond with Annual Payments

What is the price of a bond with a 6.80% coupon rate per year and a yield to maturity of 5.35% with annual payments over four years?

Choose the closest option:

a. $923

b. $1,030

c. $1,051.00

d. $1,066.21

Answer:

The price of the bond is closest to $1,051.00 when rounded to the nearest dollar. The correct option is c.

To calculate the price of the bond, we can use the present value formula for bonds. The formula is: Bond Price = (Coupon Payment / (1 + Yield)^1) + (Coupon Payment / (1 + Yield)^2) + ... + (Coupon Payment + Face Value) / (1 + (Yield)^n

The bond has a coupon rate of 6.80%, and the yield to maturity is 5.35%. The bond has a four-year maturity period.

First, let's calculate the coupon payment, which is 6.80% of the face value. As the coupon rate is expressed annually, the coupon payment is (6.80/100) * Face Value.

Next, we'll plug the values into the formula: Bond Price = (Coupon Payment / (1 + Yield)^1) + (Coupon Payment / (1 + Yield)^2) + (Coupon Payment / (1 + Yield)^3) + (Coupon Payment + Face Value) / (1 + Yield)^4

By substituting values in the equation we get $1,051.00 when rounded to the nearest dollar.