Question

A bond has a face value $1000, maturity of 10 years, and a coupon rate of 8%, paid semi-annually. Assuming the yield-to-maturity is 10%, the current price of the bond is:

Answer 1

Information provided:

Face value= future value= $1,000

Coupon rate= 8%/2= 4%

Coupon payment= 0.04*1,000= $40

Yield to maturity= 10%/2= 5% semi-annual period

Time= 10 years*2= 20 semi-annual periods

The question is solved by computing the present value of the bond.

The below has to be entered in a financial calculator to compute the present value of the bond:

FV= 1,000

PMT= 40

I/Y= 5

N= 20

The value obtained is 975.38.

Therefore, the current price of the bond is $975.38.

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