Question

Consider the following semi-annual coupon bond: $1,000 par value; 5 years until maturity; 7% coupon rate; YTM of 6%. Calculate the bond’s price today. NOTE: This is a coupon bond.

Please show all work

Answer #1

**The value of the bond is computed as shown
below:**

**The coupon payment is computed as follows:**

= 7% / 2 x $ 1,000 (Since the payments are semi annually, hence divided by 2)

**= $ 35**

**The YTM will be as follows:**

= 6% / 2 (Since the payments are semi annually, hence divided by 2)

**= 3% or 0.03**

**N will be as follows:**

= 5 x 2 (Since the payments are semi annually, hence multiplied by 2)

**= 10**

**So, the price of the bond is computed as
follows:**

**Bonds Price = Coupon payment x [ [ (1 - 1 / (1 +
r) ^{n} ] / r ] + Par value / (1 +
r)^{n}**

= $ 35 x [ [ (1 - 1 / (1 + 0.03)^{10} ] / 0.03 ] + $
1,000 / 1.03^{10}

= $ 35 x 8.530202837+ $ 744.0939149

**= $ 1,042.65 Approximately**

Feel free to ask in case of any query relating to this question

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