Question

3. Beam Inc. bonds are trading today for a price of ​$812.53. The bond pays annual coupons with a coupon rate of ​6% and the next coupon is due in one year. The bond has a yield to maturity of ​7.85%. How many years are there until the bond​ matures?

Answer 1

Solution:

We know that price of bond is the sum of present value of future coupon and present value of maturity value.In the given case,Face value(Maturity value) of bond is $1000,discount rate is 7.85% and annual coupon is $60($1000*6%)

Price of bond=Annual coupon*[1-(1+discount rate)^-no. of years/Discount rate]+Face Value*[1/(1+discount rate)^no. of years]

$812.53=$60*[1-(1+0.0785)^-no. of years/0.0785]+$1000*[1/1.0785)^no. of years]

No. of years=21 years

Thus bond will matures in 21 years