Question

8-year bonds a year ago at a coupon rate of 8 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 7 percent, what is the current bond price?

Answer 1

Answer:

Current price of bond is $1060.47

Explanation:

Coupon payment = 1000 x 8% = $80 yearly = 80/2 = $40 semiannually

Number of periods = n = 8 years x 2 periods per year = 16

Yield to maturity = 7% yearly = 7% / 2 = 3.5%

Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula:

Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]

Price of the Bond =$80 x [ ( 1 - ( 1 + 3.5% )^-16 ) / 3.5% ] + [ $1,000 / ( 1 + 3.5% )^16 ]

Price of the Bond = $80 x [ ( 1 - ( 1.035 )^-16 ) / 0.035 ] + [ $1,000 / ( 1.035 )^16 ]

Price of the Bond = $483.76 + $576.71

Price of the Bond = $1,060.47