Suppose you purchased a corporate bond with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments. This means that you receive a $50 interest payment at the end of each six-month period for 10 years (20 times). Then, when the bond matures, you will receive the principal amount (the face value) in a lump sum. Three years after the bonds were purchased, the going rate of interest on new bonds fell to 6% (or 6% compounded semiannually). What is the current market value (P) of the bond (three years after its purchase) ?

The Current market value (P) of the bond 3 years after its purchase=$957.94

Explanation:

Current market value (P) after 3 years=Semiannual coupon * (1 - (1/1+r) ^i) / r+face value / (1+r) ^i

where;

i=maturity period=3*2=6 periods

r=10%/2=5%

face value=$1,000

Semi-annual coupon = (5/100) * 1,000=$50

replacing;

Current market value (P) after 3 years=50 * (1 - (1/1+0.05) ^6) / 0.06 + (1000 / (1+0.05) ^6)

Current market value (P) after 3 years=50 * (1-0.746) / 0.06 + (1000/1.34)

Current market value (P) after 3 years=211.67+746.27

Current market value (P) after 3 years=$957.94