Answer:
The correct option is d. $ 785
Step-by-step explanation:
Since,
[tex]\text{Bond price}=\frac{C}{YTM}(1-\frac{1}{(1+\frac{YTM}{2})^{2M}})+\frac{FV}{(1+\frac{YTM}{2})^{2M}}[/tex]
Where,
C = Annual coupon payment,
FV = Face value,
M = Maturity in years,
YTM = yield to maturity,
Here,
FV = $ 1,000,
C = 7% of 1000 = [tex]\frac{7\times 1000}{100}[/tex] = 70,
M = 20 years,
YTM = 9.4% = 0.094,
By substituting the values,
[tex]\text{Bond price}=\frac{70}{0.094}(1-\frac{1}{(1+\frac{0.094}{2})^{40}})+\frac{1000}{(1+\frac{0.094}{2})^{40}}[/tex]
= $ 785.3454 ( Using calculator )
≈ $ 785
Hence, OPTION d. is correct.
