Question

"A Company has a bond outstanding with a face value of $10000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 2.5% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the bond is 5%, then the price that this bond trades for will be closest to ________. Note: Express your answers in strictly numerical terms. For example, if the answer is $500, write enter 500 as an answer."

Answer 1

Face value (F) = $10,000

Coupon payment (C) = $10,000 * 2.5%

                                   = $250

Years to maturity (N) = 10

YTM (Y) = 5%

Bond price (P):

Y = [C + (F - P) / N] / [(F + P) / 2]

0.05 = [($250) + ($10,000 – P)/10] / [($10,000 + P)/2]

0.05 = [$250 + $1,000 – 0.1P] / [$5,000 + 0.5P]

$250 + 0.025P = $1,250 – 0.1P

0.125P = $1,000

P = $8,000