Question

Valuing bonds [lo2] union local school district has a bond outstanding with a coupon rate of 3.7 percent paid semiannually and 16 years to maturity. the yield to maturity on this bond is 3.9 percent, and the bond has a par value of $5,000. what is the price of the bond?

Answer 1

 Given:

coupon rate of 3.7 percent paid semiannually and 16 years to maturity.

yield to maturity on this bond is 3.9 percent

the bond has a par value of $5,000

  

1.    Determine the Number of Coupon Payments: 

16 years * 2(semiannually) = 32 coupon payments

2.    Determine the Value of Each Coupon Payment: 

Coupon rate: 3.7% / 2 = 1.85%

Coupon payment: $1,000 x 1.85% = $18.50

3.    Determine the Semi-Annual Yield: 

Required yield: 3.9% / 2 = 1.95%

4.    Plug the Amounts Into the Formula:

Bond Price = 18.50 [ 1 – [1/(1+0.0195)^32]] / 0.0195  + 1000 / (1+0.0195)^32

Bond Price = 18.50 [ 1 – (1/1.855)] / 0.0195  + 1000 / 1.855

Bond Price = 18.50 [ 1 – 0.5391] / 0.0195 + 539.03

Bond Price = 18.50 (0.4609 / 0.0195) + 539.03

Bond Price = 18.50 (23.6359) + 539.03

Bond Price = 437.26415 + 539.03

Bond Price = 976.29415 or $976.30