Question

Rocket Engineering Inc. issued a 20-year bond with face value=par value of $1000 with 7% coupon rate bonds at par three years ago. These bonds pay coupon payments every six months. Currently, their YTM declined by 1.4%.

What is their current fair market price?

Answer 1

The value of the bond will be as follows:

The coupon payment is computed as follows:

= 7% / 2 x $ 1,000 (Because the payments are on semi annually basis, hence divided by 2)

= $ 35

The YTM will be as follows:

= 1.4% / 2 (Because the payments are on semi annually basis, hence divided by 2)

= 0.7% or 0.007

N will be as follows:

= (20 - 3) x 2 (Because the payments are on semi annually basis, hence multiplied by 2 and 3 years has lapsed and the same has been deducted)

= 34

So, the price of the bond is computed as follows:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)ⁿ ] / r ] + Par value / (1 + r)ⁿ

= $ 35 x [ [ (1 - 1 / (1 + 0.007)³⁴ ] / 0.007 ] + $ 1,000 / 1.007³⁴

= $ 35 x 30.16335901 + $ 788.8564859

= $ 1,055.717565 + $ 788.8564859

= $ 1,844.57 Approximately