Question

Two best friends, Thelma and Louise, are making long-range plans for a road trip vacation to Mexico. They will embark on this adventure in five years and want to invest during the five-year period to earn money for the trip. They decide to purchase a $1,000 Grand Canyon Oil Company bond with an annual coupon rate of 10 percent with interest to be paid semiannually. The bond will mature in five years. The YTM of similar bonds is 8 percent. How much should they be willing to pay for the bond if they purchase it today

Answer 1

Answer:

Bond Price​= $1,081.1

Explanation:

Giving the following formula:

Face value= $1,000

Number of periods= 5*2= 10 semesters

Coupon= (0.1/2)*1,000= $50

YTM= 0.08/2= 0.04

To calculate the price of the bond, we need to use the following formula:

Bond Price​= cupon*{[1 - (1+i)^-n] / i} + [face value/(1+i)^n]

Bond Price​= 50*{[1 - (1.04^-10)] / 0.04} + [1,000 / (1.04^10)]

Bond Price​= 405.54 + 675.56

Bond Price​= $1,081.1