Question 4 Neo purchases a bond issued by the Smith corporation. The bond has a

Question

Question 4 Neo purchases a bond issued by the Smith corporation. The bond has a face value of S1,0 8% semiannual coupons, and is callable at the end of the 10th through the 15th years at pa Smith convertible semiannually. If the yield rate is 1 The corporation sells the bond at the maximum price that guarantees the investor to yield 6% ower than 6%, Neo would rather invest his money in r. the bank. Determine the price that Neo pays to purchase the bond from Smith corporation (a) 1248.77 (b) 1198.77 (c) 1148.77 (d) 1098.77 (e) 1048.77

Explanation / Answer

Semiannual interest :1000*.08*6/12= 40

semiannual yield :6*6/12=3%

Semiannual months = 10*2=20

Price =[PVA3%,20*Interest]+[PVF3%,20*face value]

   = [14.87747*40]+[.55368*1000]

    = 595.10+ 553.68

    = $ 1148.77

correct option is "C"

**Assuming bond is callable at in10 year only

**2 semiannual month in a year

**

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