Question

A company’s bonds have a 10-year maturity, a 6% coupon paid semi-annually, and a par value of $1,000. The yield to maturity is quoted as 8% in the financial press. What is the bond’s price?

Answer 1

Answer:

The bond's price is calculated to be at $864.10.

Explanation:

The bond price is equal to the net present value of all cash flow generating from the bonds discounted at the yield to maturity.

We have: Semi-annual coupon payment = 1,000 x 6%/2 = $30;

                Yield to maturity = 8%/2 = 4%;

                Discounting period = 10 x 2 = 20;

                 Face value repayment in 10 year = 1,000;

Thus, Bond price = Present value of 20 equal semi-annual coupon payments stream + Present value of face value repayment at the end of 10 year = (30/4%) x [ 1 - (1+4%)^(-20) ] + [1,000/ ( 1+4%)^20] = $864.10.