Question

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 20 years to maturity, and a coupon rate of 7 percent paid annually.

If the yield to maturity is 8.1 percent, what is the current price of the bond?

Answer 1

Par Value = €1,000

Maturity = 20 years

Coupon rate = 7%

Coupon frequency = annual

Coupon = coupon rate * par value = 7% *1000 = €70

Yield to maturity, YTM = 8.1%

Price of bond can be calculated using the PV function in spreadsheet

PV(rate, number of periods, payment amount, future value, when-due)

Where, rate = Yield to maturity, YTM = 8.1%

number of periods = Maturity = 20 years

payment amount = Coupon = €70

future value = Par Value = €1,000

when-due = when is the coupon paid each year = end = 0

Price of bond = PV(8.1%, 20, 70, 1000, 0) = €892.80