Question

Grohl Co. issued 10-year bonds a year ago at a coupon rate of 8 percent. The bonds make semiannual payments. If the YTM on these bonds is 11 percent, what is the current bond price?

Answer 1

Current Price of bond (after 1 year has passed) is equal to the present value of all cshflows associated with the bonds (coupons as well principal repayment).

In order to calculate the price of bond, we would use the following formula:

Now, this price has assumed Face Value of $100. If the face value is $1000 price would be $831.3. So be cognizant of the same.

Assume the Face Value of Bond (M) to be $100.

So, Semi-annual Coupon (C) = $4

Interest rate (i) = 11%/2 = 5.5%

Time period (n) = 9 Year = 18 Semi-annual periods

Inputting all values,

Price = 44.98 + 38.15 = $83.13