Question

CEPS Group has a 11.5 percent coupon bond outstanding that matures in 8 years. The bond pays interest semiannually. What is the market price per bond if the face value is OMR 1,000 and the yield to maturity is 11.78 percent compounded semiannually?

Answer 1

The value of the bond is computed as shown below:

The coupon payment is computed as follows:

= 11.5% / 2 x OMR 1,000 (Since the payments are semi annually, hence divided by 2)

= OMR 57.50

The YTM will be as follows:

= 11.78% / 2 (Since the payments are semi annually, hence divided by 2)

= 5.89% or 0.0589

N will be as follows:

= 8 x 2 (Since the payments are semi annually, hence multiplied by 2)

= 16

So, the price of the bond is computed as follows:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)n ] / r ] + Par value / (1 + r)n

= OMR 57.50 x [ [ (1 - 1 / (1 + 0.0589)16 ] / 0.0589 ] + $ 1,000 / 1.058916

= OMR 57.50 x 10.18267724+ $ 400.2403108

= OMR 985.74 Approximately

Feel free to ask in case of any query relating to this question