Question

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere...

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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  Bond price €   

Homework Answers

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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