Question

Aloha Inc. has 4.5 percent coupon bonds on the market that have 7 years left to maturity. If the YTM on these bonds is 8.6 percent, what is the current bond price? The bond pays coupons twice a year.

Answer #1

Coupon Amount | 4.5 | ||||||||||||||||

Half yearly YTM | 8.6/2 | (Because the bond pays coupon twice a year) | |||||||||||||||

= | 4.3% | ||||||||||||||||

Half Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | |||

Coupon | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | |||

Face value | 100 | ||||||||||||||||

Cash Flows | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 104.5 | |||

Price | 4.5/(1+4.3%)^1 | 4.5/(1+4.3%)^2 | 4.5/(1+4.3%)^3 | …………………. | 104.5/(1+4.3%)^14 | ||||||||||||

P | = | 102.1 |

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