Question

Watson Co is a tech firm that hasn't figured out their product yet. They have bonds which have a face value of $1,000. The bonds carry a 4 percent semi-annual coupon, and mature in 16 years. What is the current price of these bonds if the yield to maturity (the going market rate, rd) is 5 percent?

$1327.74 |
||

$525.92 |
||

$934.72 |
||

$891.62 |
||

$890.75 |

Answer #1

Price of a bond is present value of all cash flows associated with the bond - namely coupons and maturity value. It is mathematically represented as:

where P is price of a bond, with periodic coupon C, periodic YTM i, n periods to maturity and M face value.

For our question, C = 4% * 1000/2 = $20 (semi-annual coupon)

i = 5%/2 = 2.5% (semi-annual YTM)

n = 16 * 2 = 32 semi-annual periods

P = 20 * 21.8492 + 453.7706 = 436.9836 + 453.7706

**P =
$890.75** ---> Answer

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