I'm currently working on the following practice problem and I'm not really sure where I'm going wrong...

"Some time ago you bought a bond issued by Mazota cars. The bond when issued had 10 years to maturity, a face value of $1000 and a semi-annual coupon $50. You have just received the 6th coupon from this bond and decide to sell it. The yield to maturity is currently 12% how much will you get for the bond?"

I know that the yield per period is 6% and that there are 14 periods left (20 to start with, 6 already paid out). So I would think the answer would be

[50/0.12]*(1-1/(1.06^14)) + 1000/(1.06^14) = $674.68

However, this answer is about $232 off from the correct answer of $907.05. What am I doing wrong?


You can get the "correct" answer by using 6% as the interest rate everywhere in the Present Value of an Annuity formula that you quote..

Something that the questioner got "wrong": they didn't fully specify the target yield rate; they should have said "12% compounded semi-annually" since that assumption produces their "correct" answer...

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