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The Coleman-Smith Corporation has an outstanding bond that matures in exactly 10 years. The bonds have...

The Coleman-Smith Corporation has an outstanding bond that matures in exactly 10 years. The bonds have an annual coupon of 5%. The current market interest rate is 8%.

Assume the bonds have a face value of 1,000. What should be the bond's price?

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Answer #1

First we need to know that Yield to Maturity (YTM) and current market interest rate are the same thing.

So we can use the formula for bond price:

Where,
C = Periodic coupon payment,
P = Par value of bond,
r = Yield to maturity or current market interest rate
n = No. of periods till maturity

C = 5% of 1000 = $50 per year.

Substituting the values in the formula, we get:

Therefore, the bond price should be $798.70.

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