Question

Sqeekers Co. issued 10-year bonds a year ago at a coupon rate of 7.6 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 5.9 percent, what is the current bond price?

Answer 1

Answer: 1117.4484

Explanation:

To find the price of this bond, we need to realize that the maturity of the bond is 14 years. The bond wasissued 1 year ago, with 15 years to maturity, so there are 14 years left on the bond. Also, the couponsare semiannual, so we need to use the semiannual interest rate and the number of semiannual periods.

C = Coupan rate = 1000 x (7.6%/2) = 38       Interest divided by 2 as the bond makes semi annual payment r = 5.9% / 2 = 2.95%

Remaining years = 9

n = 9*2 = 18 as the bond makes semiannual payments

Current price of bond = PV of 38 at 2.95% for 18 years + PV of $1000 at 2.95% for 18 years

= 38 PVIFA_(2.95,18)+ 1000 PVIF_(2.95,18)

= 1117.4484

You can use calculators available on the internet to get the PV annuity. For any query please comment and dont forget to give a thumbs up