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?
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
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