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Answer :
The average book value of a bond refers to the average price paid for the bond over its lifespan. In this case, we have a $2800, 5.6% bond with semi-annual coupons redeemable at par in 5 years, which was purchased at 97.5.
The average book value, we need to consider the purchase price, the face value, and the number of coupons. The bond was purchased at 97.5% of its face value of $2800. Therefore, the purchase price is 0.975 * $2800 = $2730. The total coupons received over the lifespan of the bond. Since the bond has semi-annual coupons, it will pay coupons twice a year for 5 years, resulting in a total of 10 coupons. The average book value, we need to consider the purchase price and the total coupons received. The total purchase price is $2730 and the total coupons received are $2800, which is the face value of the bond.
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