Question

1. Sameira Haddad Corp. just issued ten-year bonds that make annual coupon payments of $50. suppose you purchased one of these bonds at par value ($1,000) when it was issued. Right after your purchase, market interest rates jumped, and the YTM (interest rate) on your bond rose to six percent. What is the new price of you bond?

Answer 1

Given

Par value of the bond = $ 1000

Coupon Amount = $ 50

Term to Maturity = 10 Years.

YTM = 6%

We know that at YTM , the Present value of the future cash inflows is equal to the market price of the bond.

Year	Cash inflow	Disc @ 6%	Discounting Factor	Discounted Cash flows( Cash inflow* Discounting factor)
1	$50	1/( 1.06)^1	0.9434	$47.17
2	$50	1/( 1.06)^2	0.8900	$44.50
3	$50	1/( 1.06)^3	0.8396	$41.98
4	$50	1/( 1.06)^4	0.7921	$39.60
5	$50	1/( 1.06)^5	0.7473	$37.36
6	$50	1/( 1.06)^6	0.7050	$35.25
7	$50	1/( 1.06)^7	0.6651	$33.25
8	$50	1/( 1.06)^8	0.6274	$31.37
9	$50	1/( 1.06)^9	0.5919	$29.59
10	$50	1/( 1.06)^10	0.5584	$27.92
10	$1,000	1/( 1.06)^10	0.5584	$558.39
		Total		$926.40

Hence the Current market price of the bond is $ 926.40

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