Question

Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of the bond is $1,000 and the bond makes SEMIANNUAL coupon payments. If the required return on the bond is 10%, what is the bond's price

Answer 1

Answer:

Bond price = $1124.62

Explanation:

n = 10 year, Cr =12%, FV= $1000, r=10% P =?

The bond makes semiannual coupon payments so have to solve for C

C = 12%*1000/2 =$60

The period payments

n = 10*2 = 20

r = 10%/2 =5%

BP = C* 1 -(1+r)^-n/r +FV/ (1+r)^n

      =60*1-(1+0.05)^-20/0.05 + 1000/(1+0.05)^20

       =747.73 +376.89

        =$1124.62

Makes sense for the bond to trade above the par value since the required return/YTM is smaller than the coupon rate