Question

What is the price of a 3​-year, 7.9% coupon​ rate, $1,000 face value bond that pays interest quarterly if the yield to maturity on similar bonds is 11.9%​?

Answer 1

Since, the payment is paid quarterly and It is a 3-year Bond,

Therefore, No. of periods = 3*4 = 12 periods

Quarterly YTM = 11.9%/4 = 2.975%

Face value of the bond = 1000

Annual coupon rate = 7.9%, therefore, quarterly coupon rate = 7.9%/4 = 1.975%

Quartely coupon Payment = 1.975%*1000 = $19.75

Following are the cashflows till 12th period:

C(1) =C(2) =.....=C(11) = 19.75 and C(12)= 1019.75

The formula to calculate the present value of bond is given by below equation:

PV = 900.3112473

We can also use Financial calculator(BA II Plus)

N =12, I/Y = 2.975, PMT = 19.75, FV=1000 CPT --> PV = 900.3112473

Answer -> 900.3112473