Question

What is the price of a $1000 par value bond with a 6% coupon rate paid semiannually if the bond has 7 years to maturity and the YTM on similar bonds is 8% annually?

Answer 1

To find the price of the bond, you need to calculate the present value of its future cash flows.

Step-by-step explanation:

To find the price of the bond, we need to calculate the present value of its future cash flows. Since the bond has a 6% coupon rate paid semiannually, it will pay $60 every six months. The bond has a 7-year maturity, which means it will pay a total of 14 coupon payments. The yield to maturity (YTM) is given as 8% annually, which means it is 4% semiannually. Now, to calculate the present value, we can use the formula:

Price = (coupon payment / (1 + YTM)^n) + (coupon payment / (1 + YTM)^(n-1)) + ... + (coupon payment / (1 + YTM)^2) + (coupon payment / (1 + YTM)) + (face value / (1 + YTM)^n)

Substituting the values, we get:

Price = (60 / (1 + 0.04)^1) + (60 / (1 + 0.04)^2) + ... + (60 / (1 + 0.04)^13) + (60 / (1 + 0.04)^14) + (1000 / (1 + 0.04)^14)

Calculating this expression will give us the price of the bond.