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 / 1.007^{34}

= $ 35 x 30.16335901 + $ 788.8564859

= $ 1,055.717565 + $ 788.8564859

**= $ 1,844.57 Approximately**

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