Question

Intel recently issued semi-annual, 5.3% coupon bonds. The bond will mature in 4 years. The current yield-to-maturity for bonds like this is 2.4%. Assuming the par value is $1,000, what is the price of this bond?

Answer 1

To calculate the price of the bond, we can use the present value formula. The present value of the bond is equal to the present value of the coupon payments plus the present value of the face value. Adding the present value of the coupons and the present value of the face value, we can calculate the price of the bond.

Step-by-step explanation:

To calculate the price of the bond, we can use the present value formula. The present value of the bond is equal to the present value of the coupon payments plus the present value of the face value. The present value of the coupon payments can be calculated using the formula:

Present Value of Coupons = (Coupon Payment / (1 + Yield-to-Maturity)^1) + (Coupon Payment / (1 + Yield-to-Maturity)^2) + ... + (Coupon Payment / (1 + Yield-to-Maturity)^n), where n is the number of years until maturity.

In this case, the coupon payment is 5.3% of the par value ($1,000), so the coupon payment is $53 per year. The yield-to-maturity is 2.4%, and the bond matures in 4 years. Plugging these values into the formula, we can calculate the present value of the coupons. The present value of the face value is equal to the face value itself, which is $1,000.

Adding the present value of the coupons and the present value of the face value, we can calculate the price of the bond:

Price of Bond = Present Value of Coupons + Present Value of Face Value