Question

Westco Company issued 15-year bonds a year ago at a coupon rate of 5.4 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 4.5 percent, what is the current price of the bond in dollars?

Answer 1

The current price of the bond is $1097.40.

What is the current price of the bond?

The current price is a function of the coupon payments, par value and the YTM.

Coupon payment = (5.4%/2) x $1000 = $27

Par value = $1000

YTM = 4.5% / 2 = 2,25%

Current price = (27 / 1.0225) +  (27 / 1.0225^2) +  (27 / 1.0225^3) +  (27 / 1.0225^4) +  (27 / 1.0225^5) +  (27 / 1.0225^6) +  (27 / 1.0225^8) +  (27 / 1.0225^9) +  (27 / 1.0225^10) +  (27 / 1.0225^11) +  (27 / 1.0225^12) +  (27 / 1.0225^13) +  (27 / 1.0225^14) +  (27 / 1.0225^15) +  (27 / 1.0225^16) +  (27 / 1.0225^17) +  (27 / 1.0225^18) +  (27 / 1.0225^19) +  (27 / 1.0225^20) +  (27 / 1.0225^21) +  (27 / 1.0225^22) +  (27 / 1.0225^23) +  (27 / 1.022524) +  (27 / 1.0225^25) +  (27 / 1.0225^27) +  (27 / 1.0225^28) +  (27 / 1.0225^29) +  (27 / 1.0225^30) +  (1000 / 1.0225) = $1097.40

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