Question

Suppose BMW issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%. a. What was the price of this bond when it was issued? b. Assuming that the YTM remains constant, what is the price of the bond immediately before it makes the first coupon payment? c. Assuming that the YTM remains constant, what is the price of the bond immediately after it makes the first coupon payment?

Answer #1

a

Price of the bond is:

Particulars | Cash flow | Discount factor | Discounted cash flow |

present value Interest payments-Annuity (6%,10 periods) | 70.0 | 7.3601 | 515.21 |

Present value of bond face amount -Present value (6%,10 periods) | 1,000 | 0.5584 | 558.39 |

Bond price | 1,073.60 |

b

Price immediately before payment is = 1,073.6 * 1.06 = 1,138.02

c

Price after making payment = 1,138.02 - 70 = 1,068.02

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