Question

A bond offers a coupon rate of 10%, paid semiannually, and has a maturity of 6 years. If the current market yield is 6%, what should be the price of this bond?

Answer 1

Price of the bond should be 1207.50

YTM = [C + (F-P)/N] / (F+P)/2

Where:

YTM = Yield to Maturity = 6%

C = Annual Coupan Payment = 100

F = Face Value of the Bond = 1000

P = Purchase Price OR Current Market Price of the Bond = ?

N = Number of years remaining to maturity = 6

0.06 = [100 + (1000-P)/6] /(1000+P)/2

0.06*[(1000+P)/2] = 100 + (1000-P)/6

0.06*[500 + 0.5P] = 100 + 166.67 – 0.166 P

30 + 0.03 P = 266.67 – 0.166 P

0.196 P = 236.67

P = 1207.5

Price of the bond should be 1207.50