Question

The ExecUfind Corporation has issued 20-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the firm's current price per bond? (show all written work)

Answer 1

The coupon payments are semi annual, hence there will be 40 coupon payments in 20 years.

The semi-annual yield to maturity=12%/2=6%

semi-annual coupon payment=(10%*1000)/2=50

Price of the bond=(Coupon1/(1+6%))+(coupon2/(1+6%)^2)+(coupon3/(1+6%)^3)+(coupon4/(1+6%)^4)+.....................+(Coupon40+facevalue)/(1+6%)^40

price of the bond=(50/1.06)+(50/1.06^2)+(50/1.06^3)+(50/1.06^4)+........................(1050/1.06^40)

Price of the bond=849.54

Or else

We can also find directly with PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

rate=semi-annual yield to maturity=12%/2=6%

nper=2*20=40

pmt=semi-annual coupon payment=50

fv=1000

=PV(6%,40,50,1000,0)

PV=$849.54

Market price of the bond=$849.54