Question

Weismann Co. issued 6-year bonds a year ago at a coupon rate of 7 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 10 percent, what is the current bond price?

Answer 1

The current bond price is computed as shown below:

The coupon payment is computed as follows:

= 7% / 2 x $ 1,000 (Since the payments are semi annual, hence divided by 2)

= $ 35

YTM is computed as follows:

= 10% / 2 (Since the payments are semi annual, hence divided by 2)

= 5% or 0.05

N is computed as follows:

= 5 x 2 (Since the payments are semi annual, hence multiplied by 2)

= 10

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

= $ 35 x [ [ (1 - 1 / (1 + 0.05)¹⁰ ] / 0.05 ] + $ 1,000 / 1.05¹⁰

= $ 35 x 7.721734929 + $ 613.9132535

= $ 884.17 Approximately