Question

Weismann Co. issued 20-year bonds a year ago at a coupon rate of 6 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 10 percent, what is the current bond price? Multiple Choice $662.64 $657.90 $672.64 $755.76 $1,847.39

Answer 1

Answer: Correct answer is $662.64

Face value=$1000
Coupon rate=6%
As the bond makes semiannual payments, semiannual coupon rate=6%/2=3%
Semiannual coupon payment=Face value*Semiannual coupon rate=$1000*3%=$30
Yield to maturity=10%, so semiannual yield to maturity=10%/2=5%
Given that, Weismann Co. issued 20-year bonds a year ago. Time remaining for maturity=20-1=19 years
As the bond makes semiannual payments, total number of periods=19*2=38
Using these values in excel, we get the current value of the bond as $662.64

Note: As the present value is a cash outflow, it is shown with a negative sign in excel.