A company's bonds have a 10-year maturity, a 6% coupon paid semi-annually, and a par value of $1,000. The yield to maturity is quoted as 8% in the financial press. What is the bond's price?

Question

Business

Katherine Forbes

24 November, 11:22

A company's bonds have a 10-year maturity, a 6% coupon paid semi-annually, and a par value of $1,000. The yield to maturity is quoted as 8% in the financial press. What is the bond's price?

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Sullivan Nolan · Answer 1

The bond's price is calculated to be at $864.10.

Explanation:

The bond price is equal to the net present value of all cash flow generating from the bonds discounted at the yield to maturity.

We have: Semi-annual coupon payment = 1,000 x 6%/2 = $30;

Yield to maturity = 8%/2 = 4%;

Discounting period = 10 x 2 = 20;

Face value repayment in 10 year = 1,000;

Thus, Bond price = Present value of 20 equal semi-annual coupon payments stream + Present value of face value repayment at the end of 10 year = (30/4%) x [ 1 - (1+4%) ^ (-20) ] + [1,000 / (1+4%) ^20] = $864.10.