Question

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?

Answer 1

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”