Question

Wald Corporation has outstanding bonds with a 6-year maturity, $1,000 par value, and 7% coupon paid semiannually, and those bonds sell at their par value. Wald has another bond with the same risk, maturity, and par value, but this second bond pays a 8% semi-annual coupon. What is the price of this bond?

Answer 1

Answer:

Wald Corporation's bond has 7% coupon paid semiannually, and those bonds sell at their par value,

Since the bond sales at par value, Market rate (Yield) = Coupon rate =7%

Second bond:

Coupon rate = 8%

Par value = $1,000

Semiannual coupon amount = 1000 * 8%/2 = $40

Time to maturity = 6 years = 12 semiannual periods

Semiannual Yield = 7%/2 = 3.5%

To get price of this bond we will use PV function of excel:

= PV (rate, nper, pmt, fv, type)

= PV (3.5%, 12, -40, -1000, 0)

= $1048.32

Price of this bond = $1,048.32