Question

(CHAPTER 7) A corporation has just issued 6% coupon bonds with $1,000 face value. These bonds will mature in 13 years, and until then they will be making annual payments to their holders. The yield to maturity on these bonds is 9%. Given these bond characteristics, how much should each of these bonds be selling for in today's market? (Increase decimal places for any intermediate calculations, from the default 2 to 6 or higher. Only round your final answer to TWO decimal places: for example, 1,000.23. Do NOT use "$" in your answer.)

Answer 1

The market value is computed as shown below:

The annual coupon payment is computed as follows:

= Face value x coupon rate

= $ 1,000 x 6%

= $ 60

So, the value of the bond will be computed as follows:

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

= $ 60 x [ [ (1 - 1 / (1 + 0.09)¹³ ] / 0.09 ] + $ 1,000 / 1.09¹³

= $ 60 x 7.486903924 + $ 326.1786469

= $ 775.39 Approximately

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