Question

A bond has a coupon rate of 9.8% and pays coupons annually. The bond matures in 3 years and the yield to maturity on similar bonds is 8.8%. What is the price of the bond?

Answer 1

Price of Bond = C * [( 1 - ( 1 + R)^-N) / R] + FV / ( 1 + R)^N

Where, C = Coupon Payment

R = Yield Per period

N = Number of periods till maturity

FV = Face value

Yield Per period ( Semi - Annually) = 8.8%

Coupon Payment = Face value * Coupon rate

= 1000 * 9.8%

= 98

Number of Periods = 3

Price of bond = 98 * [( 1 - ( 1 + 8.8%)^-3] / 8.8% + 1000 / ( 1 + 8.8%)^3

= 98 [( 1 - ( 1.088)^-3] / 0.088 + [1000 / ( 1.088)^3]

= 98 [( 1 - 0.77644967) / 0.088] + 776.44967

= 98 * 2.5403446 + 776.44967

= 1025.403

Price of bond is 1025.403