Question

QUESTION 1 1. What is the price of a 10-year bond that pay 6% coupon and the yield to maturity is 7%? Answer this quickly with workings

$865.80

$865.80

$929.76

$1,073.60

$932.90

$1,070.24

Answer 1

The price of the bond is computed as shown below:

= Present value of coupon payments + Present value of par value

The coupon payment is computed as follows:

= 6% x $ 1,000

= $ 60

So, the price of the bond will be as follows:

= $ 60 / 1.07¹ + $ 60 / 1.07² + $ 60 / 1.07³ + $ 60 / 1.07⁴ + $ 60 / 1.07⁵ + $ 60 / 1.07⁶ + $ 60 / 1.07⁷ + $ 60 / 1.07⁸ + $ 60 / 1.07⁹ + $ 60 / 1.07¹⁰ + $ 1,000 / 1.07¹⁰

= $ 929.76 Approximately

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