Question

Wesimann Co. issued 10-year bonds a year ago at a coupon rate of 7 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 5.3 percent, what is the current bond price?

Answer 1

Answer:

$1,123.69

Explanation:

We can use the yield to maturity formula to determine the current market price of the bonds.

YTM = {coupon + [(face value - market value)/n]} / [(face value + market value)/2]

• YTM = 5.3% / 2 = 2.65%
• coupon = $1,000 x 7% x 1/2 = $35
• face value = $1,000
• n = 9 years x 2 = 18

0.0265 = {35 + [(1,000 - M)/18]} / [(1,000 + M)/2]

0.0265 x [(1,000 + M)/2] = 35 + [(1,000 - M)/18]

0.0265 x (500 + 0.5M) = 35 + 55.56 - 0.05555M

13.25 + 0.01325M = 90.56 - 0.05555M

0.0688M = 77.31

M = 77.31 / 0.0688 = $1,123.69