Question

Suppose that Ally Financial Inc. issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 11% (annual payments). The yield to maturity on this bond when it was issued was 12.

a. What was the price of this bond when it was issued? (Round to the nearest cent)

b. Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes it first coupon payment? (Round to nearest cent)

c. Assuming the yield of maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment? Round to nearest cent)

Answer #1

Annual Coupon = $1000 *11% =$110

a) Price of the bond when issued

= present value of coupon payments + present value of principal repayment

=110/0.12*(1-1/1.12^10)+1000/1.12^10

=**$943.50**

b) Price of the bond immediately before it makes 1st coupon payment

=110+110/1.12+....+110/1.12^9+1000/1.12^9

= 110/0.12*(1-1/1.12^10)*1.12 + 1000/1.12^9

=**$1056.72**

**c)**

Price of the bond immediately after it makes 1st coupon payment

=110/1.12+....+110/1.12^9+1000/1.12^9

= 110/0.12*(1-1/1.12^9) + 1000/1.12^9

=**$946.72**

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