Final answer:
To find the current value of a bond, you calculate the present value of its future semiannual coupon payments and the face value, all discounted at the yield to maturity. A financial calculator or spreadsheet is typically used for this computation, which is complex for semiannual payments.
Step-by-step explanation:
The current value of a company's bond with a face value of $1,000, a 6% coupon, paying interest semiannually, and maturing in 6 years, can be calculated given the yield to maturity of 7.48%. The bond's current value is its present discounted value, which includes the sum of the present values of all future coupon payments and the principal amount at maturity, discounted at the yield to maturity rate.
To calculate this, you would typically use a financial calculator or a spreadsheet to compute the present value of each semiannual payment and the principal, then sum them to get the total present value of the bond. The formula for the present value of an annuity (the coupon payments) plus the present value of a lump sum (the principal) is used. This calculation is complex due to the semiannual coupon payments, so a simplified direct answer is not provided here.
What is essential to note is that bond prices and interest rates have an inverse relationship. When interest rates rise, previously issued bonds at lower interest rates will sell for less than face value (discount), and conversely, when interest rates fall, bonds issued at higher interest rates will sell for more than face value (premium).