Question

Grohl Co. issued 17-year bonds a year ago at a coupon rate of 10 percent. The bonds make semiannual payments. If the YTM on these bonds is 10 percent, what is the current bond price?

Answer 1

If the Coupon rate of a Bond is equals to the Yield to maturity (YTM) , then the current price of a bond will be same as the face value.

Current Bond Price = $1,000

Face Value                     = $10,000

Coupon Amount = $1,000 x 5% = $50

Yield to maturity = 5% [ 10% / 2 ]

Period                   = 16 Years x 2 = 32 Years [Since the bond issued a year ago]

Market value of the Bond = Present Value of the coupon amount + Present Value of the Face Value

= $50 x (PVIF 5%,32 Years) + $1,000 x (PVF 5%, 32 Years)

= [ $50 x 15.80268 ] + [ $1,000 x 0.209866 ]

= $ 790.13 + 209.87

= $1,000