Question

wine and roses,ınc., offers a bond with a coupon of 9.50 percent with semiannual payments and yield to maturity of 10.56 percrnt.The bonds maturr in 8 years.what is market price of a 1.000 face value bond?

Answer 1

Calculation of Market price of the bond:

Given Coupon rate = 9.50%, Yield to maturity = 10.56%, Term = 8yrs, Face value = 1,000

Bonds pays semiannually so it pays 2 times a year

so here coupon rate 9.50% per year so for semiannual it will be = 9.50%/2 = 4.75%

and yield to maturity 10.56% per year for semiannual it will be = 10.56%/2 = 5.28%

and maturity 8 years company is paying semiannually so period will be = 8 years X 2 = 16 periods

Price of the bond = Sum of present value of coupon payments + Present value of redemption price

Calculation of present value of coupon payments:

Coupon payment = 1,000 X 4.75% = 47.5

Present value of coupon = 47.5(PVAF(5.28%,16periods))

Present value annuity factor for 16 periods @5.28% = 10.625

So present value of coupon payments = 47.5 X 10.625 = 504.69

Calculation of present value of redemption price:

Here, the redemption price is not given so par value will be the redemption value i.e. 1,000

So present value factor for the 16th period @5.28% = 0.439

Present value of redempton price = 1,000 X 0.439 = 439

So price of the bond = 504.69 + 439 = 943.69.