Question

iPad, Inc., has 8 percent coupon bonds in the market that have 10 years left to maturity. The bonds make semi-annual payments. If the YTM on these bonds is 12 percent, what is the current bond price?

Answer 1

As the payment is of  semi-annual then the

• Coupon rate = 8%/2 =4%
• Coupon amount = 1,000 × 4% = $40

(As nothing is mentioned in the question, it is assumed that the Face Value (FV) is $ 1,000

• YTM = 12%/2 = 6%
• No. of coupon payments = 10 × 2 = 20

So the current price of the bond =

C(1−(1+y)^-n)/y + F/(1+y)ⁿ

F = Face value

C= Coupon amount

n = number of coupon payments

Y= Yield

Current bond price

= 40(1-(1+0.06)^-20)/0.06 + 1,000/(1+ 0.06)²⁰

= 40(1- 0.312)/0.06 + 1,000 × 0.312

=40 × 0.688 / 0.06 + 312

= $(458.67 + 312)

=$770.67

So the current bond price is $ 770.67