Question

Microhard has issued a bond with the following characteristics:

Answer 1

Answer:

At Yield to maturity = 11%

Price = $1,000

Explanation:

As for the provided information we have:

Par value = $1,000

Interest each year = $1,000 $\times$ 11% = $110

Effective interest rate semiannually = 11%/2 = 5.5% = 0.055

Since it is paid semiannually, interest for each single payment = $110 $\times$ 0.5 = $55 for each payment.

Time = 8 years, again for this since payments are semi annual, effective duration = 16

Price of the bond = $C \times \frac{(1 - \frac{1}{(1+i^n)}) }{i} + \frac{M}{(1 + i)^n}$

Here, C = Coupon payment = $55

i = 0.055

n = Time period = 16

M = Maturity value = Par value = $1,000

Therefore, if yield to maturity = 11% then,

P = $55 \times \frac{1 - \frac{1}{(1 + 0.055)^1^6} }{0.55} + \frac{1,000}{(1 + 0.55)^1^6}$

= $1,000