Answer:
The bond is sold at a premium of $1155.89 -$1000 = $155.89
Explanation:
N = 10 years * 2 semiannual =20 payments of interest
coupon interest = 7% /2 = 0.035
market interest = 5% /2 = 0.025
interest = 1000*0.035 = $35 per semiannual
Pv interest for interest = [1-1/(1+0.025)^20]0.025 = 15.89 * $35 = $545.62
Pv for capital = 1000/(1+0.025)^20 = $610
value of the Bond = 610.27+ 545.62 = 1155.89
The market rate is less than the coupon rate meaning the bond is traded at a premium
Pv factor for many years = [1-1/(1+r)^n]/r
