Question

A Ford Motor Co. coupon bond has a coupon rate of

6.7%,

and pays annual coupons. The next coupon is due tomorrow and the bond matures

24

years from tomorrow. The yield on the bond issue is

6.35%.

At what price should this bond trade today, assuming a face value of

$1,000?

Answer #1

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = 6.35% (YTM of bonds = market interest rate)

nper = 24 (Years remaining until maturity with 1 coupon payment each year)

pmt = 1000 * 6.7% (annual coupon payment = face value * coupon rate)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $1,042.54

This is the bond price excluding tomorrow's coupon payment.

Tomorrow's coupon payment = $1,000 * 6.7% = $67

Price of bond = bond price excluding tomorrow's coupon payment + Tomorrow's coupon payment

Price of bond = $1,042.54 + $67

Price of bond = $1,109.54

The bond should trade at $1,109.54

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