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21 December, 15:19

Triumph Corp. issued five-year bonds that pay a coupon of 6.375 percent annually. The current market rate for similar bonds is 8.5 percent. How much will you be willing to pay for Triumph's bond today

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  1. 21 December, 16:16
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    Price of bond = $916.26

    Explanation:

    The amount to be paid for the bond would be equal to the Present value (PV) of the redemption Value (RV) plus the present value of the interest payments discounted at the yield rate.

    Let us assume that the face value of the bond is 1000 and it is redeemable at par

    Interest payment = 6.375% * 1000 = 63.75

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

    A - 63.75, r-8.5%, n-5

    PV = 63.75 * (1 - (1.085) ^ (-5)) / 0.085)

    PV = 251.215

    PV of RV

    PV = RV * (1+r) ^ (-5)

    = 1,000 * (1.085) ^ (-5)

    = 665.045

    Price of bond = $916.26
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