Question

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 25 years to maturity, and a coupon rate of 7.1 percent paid annually. If the yield to maturity is 8.2 percent, what is the current price of the bond?

Answer 1

In the given case, price of the bond is the coupon payments and the redemption amount discounted at the Yield to Maturity.

Face Value/Redemption Value = 1000

Life of Bond = 25 years

Coupon Payment = 7.1% of 1000 = 71 per annum

YTM = 8.2%

Year Inflow PVF PV
1 71 0.924 65.62
2 71 0.854 60.65
3 71 0.789 56.05
4 71 0.730 51.80
5 71 0.674 47.88
6 71 0.623 44.25
7 71 0.576 40.89
8 71 0.532 37.80
9 71 0.492 34.93
10 71 0.455 32.28
11 71 0.420 29.84
12 71 0.388 27.58
13 71 0.359 25.49
14 71 0.332 23.55
15 71 0.307 21.77
16 71 0.283 20.12
17 71 0.262 18.59
18 71 0.242 17.19
19 71 0.224 15.88
20 71 0.207 14.68
21 71 0.191 13.57
22 71 0.177 12.54
23 71 0.163 11.59
24 71 0.151 10.71
25 1071 0.139 149.32
884.56

Thus, the bond is priced at 885.56

Please Note: Present Value Factors are calculated as , that is,