Question

6) Five years ago, UMPI Corporation issued a 10% coupon (paid annually), 25-year, AA bond at its par value of $1,000. Currently, the yield to maturity on these bonds is 12%. Calculate the price of the bond today.

Answer 1

The value of the bond is computed as shown below:

The coupon payment is computed as follows:

= 10% x $ 1,000

= $ 100

N is computed as follows:

= 25 - 5

= 20

So, the value of the bond is computed as follows:

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

= $ 100 x [ [ (1 - 1 / (1 + 0.12)²⁰ ] / 0.12 ] + $ 1,000 / 1.12²⁰

= $ 100 x 7.469443624 + $ 103.6667651

= $ 850.61 Approximately

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