Question

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 12 years to maturity, and a coupon rate of 7 percent paid annuallly. If the yield to maturity is 10 percent, what is the current price of the bond?

Answer 1

Computation of Current Price of the Bond

Par Value = $1000

Years to maturity(n) = 12

Coupon Rate =7%

Coupon Payment = 7% of $1000 = $70

YTM (Yield To Maturity) = 10%

Using the formula for Current Price of the Bond,

Coupon Payment * Present Value Annuity Factor(YTM,n) + Par Value * Present Value Factor (YTM, n)

= 70 * PVAF(10%,12) + 1000 * PVF (10%,12)

= 70 * 6.81369 + 1000 * 0.31863

= 476.958 + 318.63

= $795.59

Current Price of the bond is $795.59

Note: Present Value Annuity Factor and Present Value Factor can be calculated or checked from the Tables.