Question

Gecko Incorporated bonds have a stated coupon rate of 8% and pay interest on an semi-annual basis. They mature in 6 years and have a par value of $1,000. The market rate of interest is 7%. What is the value of Gecko bonds? (round to the nearest dollar).

Answer 1

The value of the bond is computed as shown below:

The coupon payment is computed as follows:

= 8% / 2 x $ 1,000

= $ 40

The YTM will be as follows:

= 7% / 2

= 3.5% or 0.035

N will be as follows:

= 6 x 2

= 12

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

= $ 40 x [ [ (1 - 1 / (1 + 0.035)¹² ] / 0.035 ] + $ 1,000 / 1.035¹²

= $ 40 x 9.663334335 + $ 661.7832983

= $ 1,048.32 Approximately

Do ask in case of any doubts.