Question

# A corporate bond has 17 years to maturity, a face value of \$1,000, a coupon rate...

A corporate bond has 17 years to maturity, a face value of \$1,000, a coupon rate of 5.3% and pays interest semiannually. The annual market interest rate for similar bonds is 3.2% and is quoted as a semi-annually compounded simple interest rate, i.e 1.6% per 6-month period.

What is the price of the bond?

#### Homework Answers

Answer #1

The current bond price is computed as shown below:

The coupon payment is computed as follows:

= 5.3% / 2 x \$ 1,000 (Since the payments are semi annual, hence divided by 2)

= \$ 26.5

YTM is computed as follows:

= 3.2% / 2 (Since the payments are semi annual, hence divided by 2)

= 1.6% or 0.016

N is computed as follows:

= 17 x 2 (Since the payments are semi annual, hence multiplied by 2)

= 34

So, the price of the bond will be computed as follows:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)n ] / r ] + Par value / (1 + r)n

= \$ 26.50 x [ [ (1 - 1 / (1 + 0.016)34 ] / 0.016 ] + \$ 1,000 / 1.01634

= \$ 26.50 x 26.06708277 + \$ 582.9266756

= \$ 1,273.70 Approximately

Know the answer?
Your Answer:

#### Post as a guest

Your Name:

What's your source?

#### Earn Coins

Coins can be redeemed for fabulous gifts.

##### Not the answer you're looking for?
Ask your own homework help question