Question

1. A 6 percent $1,000 bond matures in 4 years, pays interest semiannually, and has a yield to maturity of 6.85 percent. What is the current market price of the bond?

Answer 1

Solution

Current price of bond=Present value of coupon payments+Present value of face value

Current price of bond=Coupon payment*((1-(1/(1+r)^n))/r)+Face value/(1+r)^n

where

n=number of periods=4*2=8

r-discount rate per period=YTM/2 in this case=6.85%/2=3.425% semiannual

Face value =1000

Semi annual coupon=Coupon rate/2*Face value=6%/2*1000=30

Current price of bond=30*((1-(1/(1+.03425)^8))/.03425)+1000/(1+.03425)^8

Current price of bond=970.694

IF YOU ARE SATISFIED WITH ANSWER,PLEASE GIVE A THUMBS UP

answered by: anonymous