You are considering investing in a GM bond with 7 years to maturity. The face value of the bond is $1,000. The coupon rate is 6% (annual payments). When the market requires a yield to maturity of 5% for this bond, what is the price of the GM bond

Price of bond is = $ 1057

Explanation:

As we know that;

Price of bond = C * [1 - (1+r) ∧-n] / r + F / (1+r) ∧n

where C = periodic coupon payment = 1000 * 6% = 60

F = Face value of bond = 1000

r = yield to maturity = 5% = 0.05

n = number of periods till maturity = 7 years

Putting values;

= 60 * [ 1 - (1 + 0.05) ∧-7 ] / 0.05 + 1000 / (1+0.05) ∧7

= 60 * (0.2893 / 0.05) + 710

= 60 * 5.786 + 710

= 347.16 + 710

= 1057