Question

The price of a 14-year, 7% coupon (paid annually) corporate bond (Par value = $1,000) which is expected to earn a yield to maturity of 13% is:

a.

$255.319

b.

$581.56

c.

$ 180.67

d.

$621.85

Answer 1

Given

Tenure of the bond (n) = 14 years

Coupon = 7% Annually

Face Value or Par Value = 1000 dollars

Yield to Matuirty = 13%

Price of the bond is calculated as follows

= C1/(1+YTM)^1 + C2/(1+YTM)^2 + C3/(1+YTM)^3 + .......................Cn/(1+YTM)^n + MV/(1+YTM)^n

C = Represents the coupon paid at the end of every year till 14 years = 1000 * 7% = 70 dollars.

YTM = Represents Yield to Matuirty = 13%

MV = Maturity Value or Face Value or Principal Value = 1000 dollars

n= Tenure of the bond

PRICE OF THE BOND

=70/(1+13%)^1 + 70/(1+13%)^2 + 70/(1+13%)^3 + .............70/(1+13%)^14 + 1000/(1+13%)^14

=61.9469 + 54.8203 + 48.5135 + 42.9323 + 37.9932 + 33.6223 + 29.7543 + 26.3312 + 23.3019 + 20.6212 + 18.2488 + 16.1494 + 14.2915 + 12.6474 + 180.6766

=621.8507 dollars

The price of the bond is 621.8507 dollars.