Question

A company has 7-year bonds outstanding that pay an 5.3 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 13.1 percent p.a.. What should the company's bonds be priced at today? Assume annual coupon payments and a face value of $1000. (Rounded to the nearest dollar)

Select one:

a. $656

b. $539

c. $2367

d. $1446

Answer 1

Information provided:

Face value= future value= $1,000

Time= 7 years

Coupon rate= 5.3%

Coupon payment= 0.053*1,000= $53

Yield to maturity= 13.1%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 53

I/Y= 13.1

N= 7

Press the CPT key and PV to compute the present value.

The value obtained is 656.11.

Therefore, the price of the bond is $656.11.

Hence, the answer is option a.