Question

A large corporation would like to borrow a large amount of money for its new expansion project. Instead of asking for a bank loan, it decided to borrow in the open market by selling a large number of corporate bonds. The price received from selling each bond becomes a "mini loan" that will then need to be repaid over a number of years.

And so the corporation has just issued 6 percent coupon bonds with $1,000 face value. These bonds will mature in 16 years, and until then they will be making annual payments to their holders. The yield to maturity on these bonds is 11 percent. Given these bond characteristics, how much should each of these bonds be selling for in today's market? (Increase decimal places for any intermediate calculations, from the default 2 to 6 or higher. Only round your final answer to TWO decimal places: for example, 1,000.23. Do NOT use "$" in your answer.)

Answer 1

Face Value of bond = $1000

Annual Coupon Bond = $1000*6%

= $60

No of years to maturity(n) = 16 years

YTM = 11%

Calculating the Selling Price of Bond:-

Price = $442.752 + $188.292

Price = $631.04

So, the selling price of bond in today's market is $631.04

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