Question

Assume that you are considering the purchase of a 10-year, noncallable bond with an annual coupon rate of 5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 6% yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? Provide the correct excel function along with inputs

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

Bond Price =∑ [(5*1000/200)/(1 + 6/200)^k]     +   1000/(1 + 6/200)^10x2

k=1

Bond Price = 925.61

excel function:

=-PV(YTM/(number of coupons per year*100),number of years*number of coupons per year,coupon rate*par value/(number of coupons per year*100),par value,)