Question

# a bond has a face value of \$1000 and 14 years until maturity. the bond has...

a bond has a face value of \$1000 and 14 years until maturity. the bond has a 3% APR coupon with semi- annual coupon payments. currently, investors seek a 6% APR yield to maturity to hold the bond. what is the current trading price of the bond?

The value of the bond is computed as shown below:

The coupon payment is computed as follows:

= 3% / 2 x \$ 1,000 (As the payments are semi annually, hence divided by 2)

= \$ 15

The YTM will be as follows:

= 6% / 2 (As the payments are semi annually, hence divided by 2)

= 3% or 0.03

N will be as follows:

= 14 x 2 (As the payments are semi annually, hence multiplied by 2)

= 28

So, the price of the bond is computed as follows:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)n ] / r ] + Par value / (1 + r)n

= \$ 15 x [ [ (1 - 1 / (1 + 0.03)28 ] / 0.03 ] + \$ 1,000 / 1.0328

= \$ 15 x 18.76410823 + \$ 437.0767532

= \$ 718.54

Do ask in case of any doubts.

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