Answer:
The current price of these bonds is $1,020.26.
Explanation:
Annual coupon = Bond face value * Coupon rate = $1000 * 7.2% = $72
Annual coupon discount factor = ((1 - (1 / (1 + r))^n) / r) .......... (1)
Where;
r = semi-annul interest rate = 6.98% / 2 = 3.49%, or 0.0349
n = number of period = 15 years * 2 = 30 semi-annuals
Substituting the values into equation (1), we have:
Annual coupon discount factor = ((1-(1/(1 + 0.0349))^30)/0.0349) = 18.4151103213524
Present value of coupon = (Annual coupon * Annual coupon discount factor) / 2 = ($72 * 18.4151103213524) / 2 = $662.943971568686
Present value of the face value of the bond = Face value / (1 + r)^n = $1,000 / (1 + 0.0349)^30 = $357.312649784802
Therefore, we have:
Current price of bond = Present value coupon + Present value of the face value of the bond = $662.943971568686 + $357.312649784802 = $1,020.25662135349
Approximating to 2 decimal places, we have:
Currenr price of bond = $1,020.26
Therefore, the current price of these bonds is $1,020.26.
