Question

GE Co has 7,25% coupon bonds on the market that have 11 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 8,5%,what is the current bond price?

Answer 1

Lets assume the face value of bond is 100

Current bond price= PV of all the bond cashflows = PV of coupon payment+ PV of facevalue

PV of coupon payments= A*[1-(1+r)^-n]/r ------------annuity formula-----

where A=coupon payment= 7.25%*100= 7.25 ; r=YTM=8.5% ; n=no of years=11

PV of coupon payments= 7.25*[1-(1+8.5%)^-11]/.085 =50.525

PV of face value= 100/(1+YTM)^n =100/(1+8.5%)^11 =40.76

Therefore,

Current bond price= 50.525+40.76 =91.286 $ (for a face value of 100$)

note: if face value is given as 1000; bond price =912.86 $