Question

3. 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?

Please answer the question in detail and show all work of how you arrived to what. Thank you!

Answer 1

Information provided:

Time= 12.5 years*2= 25 semi-annual periods

Future value= $1,000

Coupon rate= 6.27%/2= 3.1350%

Coupon payment= 0.0314*1,000= $31.25

Yield to maturity= 9.33%/2= 4.66%

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

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

FV= 1,000

PMT= 31.25

I/Y= 4.66

N= 25

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

The value obtained is 777.55.

Therefore, the purchase price of the bond is $777.55.

In case of any query, kindly comment on the solution.