Question

Hogwarts Publications has $1,000 face value bonds, which mature in 8 years. They have a 6.25% annual coupon rate and the yield to maturity is 10%. What is the selling price of the bonds?

Answer 1

Information given:

Face value = $1000

Maturity - 8 years

Coupon rate - 6.25%

Coupon value - 62.5$

YTM - 10%

Selling price = Current value of face value + current value of coupons

= 62.5 / (1 + 0.1) + 62.5 / (1 + 0.1)^2 + 62.5 / (1 + 0.1)^3 + 62.5 / (1 + 0.1)^4 + 62.5 / (1 + 0.1)^5 + 62.5 / (1 + 0.1)^6 + 62.5 / (1 + 0.1)^7 + (62.5 + 1000) / (1 + 0.1)^8

= 62.5/1.1 + 62.5 / (1.1)^2 + 62.5 / (1.1)^3 + 62.5 / (1.1)^4 + 62.5 / (1.1)^5 + 62.5 / (1.1)^6 + 62.5 / (1.1)^7 + (1062.5) / (1.1)^8

= 56.82 + 51.653 + 46.96 + 42.69 + 38.81 + 35.28 + 32.07 + 495.662

= 799.945

Thus, selling price = $799.945

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