Question

1. KN bonds have a 7.5% coupon rate and face value of $1,000. Coupons are paid quarterly and the bonds have a maturity of eight years. If the yield to maturity is 8% on similar bonds, what is the price of KN bonds?

Answer 1

Price of KN Bonds

The Price of the Bond is the Present Value of the Coupon payments plus the Present Value of Par Value

Par Value = $1,000

Quarterly Coupon Amount = $18.75 [$1,000 x 7.50% x ¼]

Quarterly Yield to Maturity (YTM) = 2% [8% x ¼]

Maturity Years = 32 Years [8 Years x 4 Quarters]

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

= $18.75[PVIFA 2%, 32 Years] + $1,000[PVIF 2%, 32 Years]

= [$18.75 x 23.46833] + [$1,000 x 0.53063]

= $440.03 + $530.63

= $970.66

“Hence, the Price of the KN Bonds = $970.66”