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28 August, 00:08

A 5% coupon, 18-year annual bond has a yield to maturity of 6.2%. Assuming the par value is $1,000 and the YTM does not change over the next year, what will the price of the bond be today

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  1. 28 August, 01:51
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    Price of Bond=$871.997

    Explanation:

    The price of a bond is the present value (PV) of the future cash inflows expected from the bond discounted using the yield to maturity.

    Price of Bond = PV of interest payment + PV of redemption value

    PV of interest payment

    interest payment = 5% * 1,000 = $50

    PV = A * (1 - 1+r) ^ (-n) / r

    r - 6.2%, n - 18, A - 50

    PV = 50 * (1 - 1.062^ (-18)) / 0.062=533.341

    PV of redemption

    PV = FV * (1+r) ^ (-n)

    PV = 1,000 * 1.062^ (-18) = 338.655

    Price of the stock = 533.3419 + 338.655

    Price of Bond=$871.997
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