Question

Goldenbeam Corp., is planning to issue bonds. Par value of the bonds is $1,000 and they will be mature in 12 years from now. Inflation rate is 2.5%, real interest rates are 5,6%. Yield to maturity of the bonds will be equal to nominal interest rates in the market. Coupon payments will be nominal interest rates+1 percent (if nominal interest rate is 5%, then coupon payment will be 6%). How much would be the fair price of this bond?

Answer 1

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

0.056=((1+Nominal return)/(1+0.025)-1)*100

Nominal return = 8.24

coupon rate = 8.24+1 = 9.24%

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =12

Bond Price =∑ [(9.24*1000/100)/(1 + 8.24/100)^k]     +   1000/(1 + 8.24/100)^12

k=1

Bond Price = 1074.43