Question

Oil Well Supply offers a 8 percent coupon bond with semiannual payments and a yield to maturity of 8.73 percent. The bonds mature in 9 years. What is the market price per bond if the face value is $1,000?

Answer 1

Answer:

Market price today   $955.1347

Explanation:

To know the current market price we will calculate the present value ofthe cuopon payment and the maturity at the yield to maturity rate of 8.73%

Present value of the annuity

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

Cupon Payment: 1,000 face value x 8% / 2 payment per year = 40

time = 9 years x 2 payment per year = 18

rate = 8.73% = 0.0873 = 0.0873/2 = 0.04365

$40 \times \frac{1-(1+0.04365)^{-18} }{0.04365} = PV$

PV $491.6747

Present value of the maturity

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity = face value =   1,000.00

time   18.00

rate  0.04365

$\frac{1000}{(1 + 0.04365)^{18} } = PV$  

PV   463.46

Now we add both together to get the present value of the bond

PV c   $491.6747

PV m   $463.4599

Total   $955.1347