Question

The Whitesell Athletic Corporation's bonds have a face value of $1,000 and a 10% coupon paid semi-annually. The bonds mature in 10 years. If the yield to maturity (YTM) is 7%, what will the bond sell for

Answer 1

Answer:

Bond Price = $1213.18605 rounded off to $1213.19

Explanation:

To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,

Coupon Payment (C) = 1,000 * 0.10 * 6/12  = $50

Total periods (n) = 10 * 2 = 20  

r or YTM = 0.07 * 6/12 = 0.035

The formula to calculate the price of the bonds today is attached.

Bond Price = 50 * [( 1 - (1+0.035)^-20) / 0.035]  + 1000 / (1+0.035)^20

Bond Price = $1213.18605 rounded off to $1213.19