Question

Genesis corp. issued a 20-year semi-annual bond with a face value of $1,000, and an annual coupon rate of 8%. The bond equivalent yield (BEY) is 9%. What is the Bond’s price?

$936

$908

$1,080

$1,000

$966

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:

= 9% / 2

= 4.5% or 0.045

N will be as follows:

= 20 x 2

= 40

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 + 0.045)⁴⁰ ] / 0.045 ] + $ 1,000 / 1.045⁴⁰

= $ 40 x 18.40158442 + $ 171.9287011

= $ 908 Approximately

Please ask in case of any doubts