Answer:
Explanation:
Assuming the face value is $1,000
Coupon payment = 1000 x 7.8% = $78 annually = $39 semiannually
Number of periods = n = 20 years x 2 = 40 periods
Yield to maturity = 7% annually = 3.5% semiannually
Price of bond is the present value of future cash flows, 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 =$39 x [ ( 1 - ( 1 + 3.5% )^-40 ) / 3.5% ] + [ $1,000 / ( 1 + 3.5% )^40 ]
Price of the Bond = $39 x [ ( 1 - ( 1.035 )^-40 ) / 0.035 ] + [ $1,000 / ( 1.035 )^40 ]
Price of the Bond = $832.85 + $252.57
Price of the Bond = $1,085.42
