Question

Weismann Co. issued 11-year bonds a year ago at a coupon rate of 12 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 11 percent, what is the current bond price?

Answer 1

The current bond price is computed as shown below:

The coupon payment is computed as follows:

= 12% / 2 x $ 1,000 (Since the payments are semi annual, hence divided by 2)

= $ 60

YTM is computed as follows:

= 11% / 2 (Since the payments are semi annual, hence divided by 2)

= 5.5% or 0.055

N is computed as follows:

= 10 x 2

= 20

So, the current bond price will be as follows:

= $ 60 / 1.055¹ + $ 60 / 1.055² + $ 60 / 1.055³ + $ 60 / 1.055⁴ + $ 60 / 1.055⁵ + $ 60 / 1.055⁶ + $ 60 / 1.055⁷ + $ 60 / 1.055⁸ + $ 60 / 1.055⁹ + $ 60 / 1.055¹⁰ + $ 60 / 1.055¹¹ + $ 60 / 1.055¹² + $ 60 / 1.055¹³ + $ 60 / 1.055¹⁴ + $ 60 / 1.055¹⁵ + $ 60 / 1.055¹⁶ + $ 60 / 1.055¹⁷ + $ 60 / 1.055¹⁸ + $ 60 / 1.055¹⁹ + $ 60 / 1.055²⁰ + $ 1,000 / 1.055²⁰

= $ 1,059.75 Approximately

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