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**CFA Practice Question**

Consider a situation where an investor wants to invest in a semi-annual coupon-paying bond maturing 13 years from now with a face value of $1,000,000 and a coupon payment of $6,423. The corresponding YTM is said to be 6.981%. What should the price of the bond be today?

A. $518,417

B. $581,417

C. $511,217

**Explanation:**When coupons are received twice per year, the value of the coupon bond can be specified as follows: P = C([1-{1 / (1+[YTM / 2])

^{t}}]/[YTM / 2]) + F / (1+[YTM / 2])

^{t}, where P = bond value, C = semi-annual coupon payment, t = number of semi-annual periods until maturity, YTM = yield to maturity, and F = face value. Here, C = $6,423, t = 26, YTM = 0.06981, and F =$1,000,000. It follows that: P =6,423 x ([1 - 1/{1+. 06981 / 2}

^{26}] / [.06981 / 2]) + 1,000,000 / (1+. 06981 / 2)

^{26}= $518,417.

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**User Contributed Comments**
12

User |
Comment |
---|---|

quincy |
n=26, pmt=6.423, i=3.49, fv=1000, pv=518.474 |

Xocrevilo |
Note that the coupon payment quoted is already on a semi-annual basis. |

copus |
It is not clear that the coupon is already quoted on a semi annual basis, however, if you divide the coupon by 2, you come up with an answer of 464,115 which is not one of the options. If option c had been (none of the above), this would have been a tricky question. |

apiccion |
Thanks Xocrevilo. I didn't catch that one. |

scancubus |
Good thing that they mention that its already semi-annual, along with everything else being annual. It definately wouldn't be this clear in the real world, so I can understand their reasoning. |

kellyyang |
yes, made a mistake with coupon pmt. Tricky one! |

jonnyp |
Having a hard time understanding how you know to put 6.423 as pmt? |

cslau83 |
my BAII Plus got 514981 instead... |

cslau83 |
Accidentall set C/Y = 2 ... my bad |

Polagaro |
OMG i was 15 minutes with this one, i was assuming que coupon was annual and didn´t understand why i wasn´t able to solve something so easy. Tricky one! |

GBolt93 |
Did the exact same thing. now kicking myself for missing something so easy. |

Lambo83 |
What the hell is the equation articulated in the answer explanation? Don't get it and never seen it before. |