Answer: $687.10
Explanation:
The value of a bond is the present value of the bond's coupon payments plus the present value of the bond's par value at maturity.
First convert terms to semi-annual periods as the coupon rate is semi annual:
Coupon payment = (1,000 * 8.75%) / 2 = $43.75
Required return = 13% / 2 = 6.5%
Number of periods = 25 * 2 = 50 semi annual periods
The coupon payment is an annuity so the value of the bond is:
= Present value of annuity + Present value of par
= (43.75 * ( 1 - (1 + 6.5%) ⁻⁵⁰) / 6.5%) + 1,000 / ( 1 + 6.5%)⁵⁰
= $687.10
