Question

Nesmith Corporation's outstanding bonds have a $1,000 par value, a 6% semiannual coupon, 18 years to maturity, and an 8.5% YTM. What is the bond's price?

Answer 1

The way to solve such kind of question is to create the cash flows. Coupon each 6 months will be (1000*0.06)=60

36 payments of 60 and finally in the 18th year..ie the along with the 36 payment principle also we will receive.so the cash flows look like

60 60 60.......................................................1060

We need to find the pv of these cash flows using YTM(Yield to maturity) as discount rate. By doing so we will get the price of the bond to be $1339.56. Make sure you remember this is semi-annualy. the calcs be like 60/1.085^0.5 + 60/1.085^1.............the increment in exponential will be by 0.5.