Question

Consider a corporate bond with a 4.3% coupon rate, paid semi-annually, $1000 par value and a current yield to maturity (YTM) of 3.7%. It matures in exactly 8 years.

What is the current market price of this bond? [Your final answer should be ROUNDED TO THE NEAREST DOLLAR, expressed in dollars only (eg 234) with no cents, and no commas!]

Market Price =

Answer 1

Market Price of Bond=Present value of par value+Present value of coupon payments

Present Value (P)=C/{[(1+r)^n]}

Where,

C=Future Value= 1000

r=ROI= 0.0185

n=No. of periods= 16

Now putting values in formula,

= 1000/{[(1+ 0.0185)^16 ]}

= 1000/{[( 1.0185)^16 ]}

= 1000/{[ 1.34084 ]}

= 745.8019

Present Value of Annuity Factor(P)=A{1-[(1+r)^-n]/r}

Where,

A=Annuity Amount= 21.5

r=ROI= 0.0185

n=No. of periods= 16

Now putting values in formula,

= 21.5{1-[(1+ 0.0185)^-16 ]/ 0.0185}

= 21.5{1-[( 1.0185)^-16 ]/ 0.0185}

= 21.5{1-[ 0.7458 ]/ 0.0185}

= 21.5{ 0.2542 / 0.0185}

= 21.5{ 13.74044}

= 295.41945

Market price of bonds=745.8019+295.41945=$1041.22 or $1041

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