Question

A newly issued 10-year maturity, 4% coupon bond making annual coupon payments is sold to the public at a price of $800. The bond will not be sold at the end of the year. The bond is treated as an original-issue discount bond.
Required: Calculate the constant yield price.

Answer 1

The constant yield price of the newly issued 10-year maturity, 4% coupon bond making annual coupon payments sold at $800 is $14.56.

What is the constant yield price?

The constant yield price is the adjusted basis multiplied by the yield at issuance and then subtracting the coupon interest.

The yield at issuance can be calculated using the yield to maturity rate (which is determined using an online finance calculator) as follows:

Data and Calculations:

Face value = $1,000

Bond price = $800

Annual coupon rate = 4%

Annual interest = $40 ($1,000 x 4%)

Coupon frequency = Annually

Years to maturity = 10 year(s)

Yield to maturity (YTM) = 6.82%

Constant yield price = $14.56 ($800 x 6.82% - $40)

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Thus, the constant yield price of the newly issued 10-year maturity, 4% coupon bond making annual coupon payments sold at $800 is $14.56.

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