Question

Assume that the XYZ Company issued a bond with a face value of $1,000, and coupon rate of 10%. if the YTM is now 6% and there are 14 years left to maturity and the company gives semi annual coupon. What is the bond price?

Answer 1

We know that,

Price of a bond = Present value of all the semi-annual coupons and face value discounted at semi-annual ytm

Face Value = 1000

Number of payments = 14*2 = 28

Semi-annual coupon amount = 0.1 *1000/2 = 50

Semi-annual ytm = 0.06/2 = 0.03

Price of the bond = 50/(1+semi-annual ytm)^1 + 50/(1+semi-annual ytm)^2 + 50/(1+semi-annual ytm)^3 + 50/(1+semi-annual ytm)^4 + 50/(1+semi-annual ytm)^5 + .......................... +50/(1+semi-annual ytm)^10 +50/(1+semi-annual ytm)^11 + 50/(1+semi-annual ytm)^28 + 1000/(1+semi-annual ytm)^28

We will use heat and trial method to get that value for which above equation satisfies.

Price = 1375.28 Answer