Question

1. An investor has asked us about the purchase price of a bond that has an 6.27% annual coupon rate (paid semi-annually), while interest rates in the market on similar quality issues are currently paying 9.33%. The bond issue in question has 12 and a half years to maturity. How much should the investor be willing to pay for this bond?

Answer 1

Information provided:

Future value= $1,000

Time= 12.50 years*2= 25 semi-annual periods

Coupon rate= 6.27%/2= 3.1350%

Coupon payment= 0.01350*1,000= $31.35

Yield to maturity= 9.33%/2= 4.67%

The purchase price of the bond is calculated by computing the present value of the bond.

Enter the below in a financial calculator to calculate the present value:

PV= 1,000

N= 25

PMT= 31.35

I/Y= 4.67

The value obtained is 776.32.

The investor should be willing to pay $776.32 for the bond.

In case of any further queries, kindly comment on the solution.