Question

State Farm recently issued a semi-annual, 6% coupon bond. The bond will mature in 22 years. The current yield-to-maturity for bonds like this is 9%. Assuming the par value is $1,000, what is the price of this bond?

Answer 1

To find the price of a semi-annual 6% coupon bond with a 9% yield-to-maturity, one must discount the semi-annual interest payments and the face value, which results in the bond selling for less than its $1,000 face value.

Step-by-step explanation:

The question relates to determining the current price of a semi-annual 6% coupon bond issued by State Farm that has a maturity of 22 years and a yield-to-maturity (YTM) of 9%.

When the current YTM is higher than the coupon rate, it leads to the bond being sold at a discount to its face value. This is because investors require a higher rate of return due to changes in the market rates.

Calculating the bond's price requires discounting the future cash flows, which include semi-annual interest payments and the principal repayment at maturity, at the current market rate of 9%. The formula for the present value of an annuity (for the interest payments) and a lump sum (for the maturity value) should be used. However, since the question doesn't ask for explicit calculation and instead focuses on understanding the concept, we can conclude that due to the higher YTM, the bond will sell for less than its face value of $1,000.