Question

1. USP issues10-year bonds of $1,000 face value, with a coupon (interest payment) of 5.5% ($55). What is the current face value of the bonds if investors believe a yield to maturity should be 7%?

Answer 1

Information provided:

Face value= future value= $1,000

Time= 10 years

Coupon rate= 5.5%

Coupon payment= 0.055*1,000= $55

Yield to maturity= 7%

The current face value of the bond is calculated 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= 55

I/Y= 7

N= 10

Press the CPT key and PV to compute the present value.

The value obtained is 894.65.

Therefore, the current face value of the bond is $894.65.

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