A Ford Motor Co. coupon bond has a coupon rate of 6.85%, and pays annual coupons. The next coupon is due tomorrow and the bond matures 28 years from tomorrow. The yield on the bond issue is 6.15%. At what price should this bond trade today, assuming a face value of $1,000?
Trading Price of the Bond today
The Current Price of the Bond is the Present Value of the Coupon payments plus the Present Value of Par Value
Par Value = $1,000
Annual Coupon Amount = $68.50 [$1,000 x 6.85%]
Yield to Maturity (YTM) = 6.15%
Maturity Years = 28 Years
Current Price of the Bond = Present Value of the Coupon payments + Present Value of Par Value
= $68.50[PVIFA 6.15%, 28 Years] + $1,000[PVIF 6.15%, 28 Years]
= [$68.50 x 13.20267] + [$1,000 x 0.18804]
= $904.38 + $188.04
= $1,092.42
Here, the next coupon is due tomorrow, therefore, the trading price of the bond today
= Current Price of the Bond + Next annual coupon payment
= $1,092.42 + $68.50
= $1,160.92
“Hence, the trading price of the Bond today would be $1,160.92”
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