Question

You are eyeing an investment in a corporate bond which has a YTM of 14.95%, and a stated rate of interest of 13.04% paid semi-annually, with a maturity of 20 years, and a PAR value of $1,000. What is the price of this bond?

Answer 1

The value of the bond is computed as shown below:

The coupon payment is computed as follows:

= 13.04% / 2 x $ 1,000 (Since the payments are semi annually, hence divided by 2)

= $ 65.2

The YTM will be as follows:

= 14.95% / 2 (Since the payments are semi annually, hence divided by 2)

= 7.475% or 0.07475

N will be as follows:

= 20 x 2 (Since the payments are semi annually, hence multiplied by 2)

= 40

So, the price of the bond is computed as follows:

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

= $ 65.2 x [ [ (1 - 1 / (1 + 0.07475)⁴⁰ ] / 0.07475 ] + $ 1,000 / 1.07475⁴⁰

= $ 65.2 x 12.62960074 + $ 55.9373449

= $ 879.39 Approximately

Feel free to ask in case of any query relating to this question