Question

Telstra is selling 5 year bonds at a face value of $1,000,000 which pay a semi-annual...

Telstra is selling 5 year bonds at a face value of $1,000,000 which pay a semi-annual coupon of 6% p.a.

You require a yield-to-maturity (YTM) of 7% p.a. on Telstra's bonds, what price are you willing to pay for each Telstra bond?

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Answer #1

We need to calculate the current price of this bond. Price of bond is the present value of all cashflows associated with the bond - coupons and maturity amount.

It is given by the mathematical relation:

where C is the coupon, n is the number of periods, i is the YTM and n is the number of periods.

For the bond in question,

Coupon, C = $60000 (annual) --> $30000 (semi-annual)

Number of periods, n = 5 years --> 10 semi-annual periods

YTM = 7% (Annual) --> 3.5% (Semi-annual)

Maturity Value, M = $1,000,000

Substituting all values in the mathematical relation above:

P = $249,498.16 + 708,918.81

Hence, price = $958,416.97

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