Question

Assume a par value of $1,000. Caspian Sea plans to issue a 13.00 year, annual pay bond that has a coupon rate of 8.17%. If the yield to maturity for the bond is 7.73%, what will the price of the bond be?

Assume a par value of $1,000. Caspian Sea plans to issue a 8.00 year, annual pay bond that has a coupon rate of 7.85%. If the yield to maturity for the bond is 8.19%, what will the price of the bond be?

Answer 1

Solution:

a)Calculation of Price of Bond:

Price of bond is the sum of present value of future coupon on it and present value of its maturity value.We shall use YTM as discount rate to calculate present value.Calculation is as follow:

Price of bond=Annual coupon*PVAF(7.73%,13)+Maturity value*PVIF(7.73%,13)

=($1000*8.17%)*8.02251+$1000*0.37986

=$1035.30

b)Calculation of Price of bond:

Price of bond=Annual Coupon*PVAF(8.19%,8)+Maturity value*PVIF(8.19%,8)

=($1000*7.85%)*5.70543+$1000*0.53272

=$980.60