Question

Microhard has issued a bond with the following characteristics:

Par: $1,000

Time to maturity: 12 years

Coupon rate: 7 percent

Semiannual payments

Calculate the price of this bond if the YTM is (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.):

  

		Price of the Bond
a.	7 percent	$
b.	9 percent	$
c.	5 percent	$

Answer 1

Par Value = $1,000

Annual Coupon Rate = 7.00%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50% * $1,000
Semiannual Coupon = $35

Time to Maturity = 12 years
Semiannual Period = 24

Answer a.

Annual YTM = 7.00%
Semiannual YTM = 3.50%

Price of Bond = $35 * PVIFA(3.50%, 24) + $1,000 * PVIF(3.50%, 24)
Price of Bond = $35 * (1 - (1/1.035)^24) / 0.035 + $1,000 / 1.035^24
Price of Bond = $1,000.00

Answer b.

Annual YTM = 9.00%
Semiannual YTM = 4.50%

Price of Bond = $35 * PVIFA(4.50%, 24) + $1,000 * PVIF(4.50%, 24)
Price of Bond = $35 * (1 - (1/1.045)^24) / 0.045 + $1,000 / 1.045^24
Price of Bond = $855.05

Answer c.

Annual YTM = 5.00%
Semiannual YTM = 2.50%

Price of Bond = $35 * PVIFA(2.50%, 24) + $1,000 * PVIF(2.50%, 24)
Price of Bond = $35 * (1 - (1/1.025)^24) / 0.025 + $1,000 / 1.025^24
Price of Bond = $1,178.85