Question

Microhard has issued a bond with the following characteristics: Par: $1,000 Time to maturity: 21 years Coupon rate: 9 percent Semiannual payments Calculate the price of this bond if the YTM is (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.):

Answer 1

Microhard has issued a bond with the following characteristics: Par: $1,000 Time to maturity: 21 years Coupon rate: 9 percent Semiannual payments Calculate the price of this bond if the YTM is  6% (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.):

Answer:

Price of bond = $982.63

Explanation:

The value of the bond is the present value (PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

Value of Bond = PV of interest + PV of RV

The value of bond for Microhard can be worked out as follows:

Step 1  

PV of interest payments

Semi annul interest payment  

= 9% × 1000 × 1/2 = 45

Semi-annual yield = 6%/2 = 3 % per six months

Total period to maturity (in months)

= (2 × 21) = 42 periods

PV of interest =  

45 × (1- (1+0.03)^(-21)/0.03)= 693.6

Step 2  

PV of Redemption Value

= 1000 × (1.03)^(-21×2) =288.95

Price of bond

= 693.6 + 288.95 =982.63

Price of bond = $982.63