Question

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 20 years to maturity, and a coupon rate of 7.8 percent paid annually. |

If the yield to maturity is 8.9 percent, what is the current
price of the bond? |

Bond price |
€ |

Answer #1

Given:

Face Value - €1000

Coupon Rate - 7.8%

Years to maturity - 20

Yied to Maturity - 8.9%

Current Price (Intrinsic value) of the bond = Present value of all the interest payments and maturity proceeds (using YTM as discount rate)

Interest (yearly) - €78

Maturity Value (assuming Maturity at Par) - €1000

Present Value Annuity factor (8.9%, 20years) - 9.375

Present Value Interest factor (8.9%, 20th year) - 0.1817

Intrinsic Value of Bond (Bond Price) = (78*9.375) +
(1000*0.1817) ==> **€ 898.87**

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