Question

BOND TYPE: Corporate,

YIELD-TO-MATURITY: 5 percent

ANNUAL COUPON RATE: 5 percent

COUPON FREQUENCY: Semi - Annual

MATURITY DATE: Today’s Date with the year set to 4 years from now. (i.e. If today is July 21, 2019, then it should be July 21, 2023)

PAR VALUE: $1000.00

QUANTITY: 1

SETTLEMENT DATE: Today's date (i.e. July 21, 2019).

Compute the price of this bond using the formula, the formula that computes the present value of future cash flows of the bond, using the yield-to-maturity as the discount rate.

Answer 1

Using Excel,

Annual YTM = 5%, So semi-annual rate = 5% / 2 = 2.5%

Manually using calculator, the cash flows are 25,25,25,25,25,25,25,1025

PV of cash flows = 25/(1+ 2.5%) + 25/(1+2.5%)^2 + 25/(1+ 2.5%)^3 + 25/(1+ 2.5%)^4 + 25/(1+ 2.5%)^5 + 25/(1+ 2.5%)^6+ 25/(1+ 2.5%)^7 + 1025/(1+2.5%)^8 = $ 1000

Formulae (excel)