Question

# With celebrity​ bonds, celebrities raise money by issuing bonds to investors. The royalties from sales of...

With celebrity​ bonds, celebrities raise money by issuing bonds to investors. The royalties from sales of the music are used to pay interest and principal on the bonds. In April of​ 2009, EMI announced that it intended to securitize its back catalogue with the help of the Bank of Scotland. The bond was issued with a coupon rate of 6.75% and will mature on this day 21

years from now. The yield on the bond issue is currently 6.3%.

At what price should this bond trade​ today, assuming a face value of \$1,000 and annual​ coupons?

Price of the Bond

The 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 = \$67.50 [\$1,000 x 6.75%]

Yield to Maturity (YTM) = 6.30%

Maturity Years = 21 Years

The Price of the Bond = Present Value of the Coupon payments + Present Value of Par Value

= \$67.50[PVIFA 6.30%, 21 Years] + \$1,000[PVIF 6.30%, 21 Years]

= [\$67.50 x 11.47293] + [\$1,000 x 0.27721]

= \$774.42 + \$277.21

= \$1,051.63

“Therefore, the Bond is trading at \$1,051.63”

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