Answer:
a.
Bond Price = $1071.766818 rounded off to $1071.77
b.
Bond Price = $934.0515914 rounded off to $934.05
c.
Current Yield = 0.06423 or 6.423%
Explanation:
a.
To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,
Coupon Payment (C) = 1000 * 0.06 * 6/12 = $30
Total periods (n) = 9 * 2 = 18
r or YTM = 0.05 * 6/12 = 0.025 or 2.5%
The formula to calculate the price of the bonds today is attached.
Bond Price = 30 * [( 1 - (1+0.025)^-18) / 0.025] + 1000 / (1+0.025)^108
Bond Price = $1071.766818 rounded off to $1071.77
b.
Replacing YTM or r with = 7% * 6/12 = 3.5% or 0.035 in the above formula with everything else being constant, we calculate the price to be,
Bond Price = 30 * [( 1 - (1+0.035)^-18) / 0.035] + 1000 / (1+0.035)^108
Bond Price = $934.0515914 rounded off to $934.05
c.
The current yield is the coupon or interest payment made by the bond over a year which is expressed as a percentage of its current price.
Current Yield = (30 * 2) / 934.05
Current Yield = 0.06423 or 6.423%
