Question

Dexter Gordon Mills, LLP just issued 20-year bonds, with a coupon rate of 10.2 percent. The bonds make semiannual payments. The yield-to-maturity on these bonds is 9.2 percent. What is the current bond price?

a.) $1,081

b.) $1,091

c.) $1,000

d.) $1,100

e.) $1,107

Answer 1

Solution:

Face Value of Bond = $1000

Maturity = 20 years = 40 Half Years

Coupon rate = 10.2% yearly = 5.1% semi Annual

Semi Annual Interest Payment = $1000*5.1% = $51

Yield to Maturity = 9.2% yearly = 4.6% semi annual

Current Bond Price = Present Value of Interest Payments + Present Value of Maturity Value of Bond

= $51* Cumulative PV factor @4.6% for 40 periods + $1000* PV Factor @4.6% at 40th period

= $51* 181418459 + $1000*0.16547509

= $1090.709

= 1091

Hence, option "b" is correct.