Question

Nesmith Corporation's outstanding bonds have a $1,000 par value, a 7% semiannual coupon, 18 years to maturity, and a 9% YTM, What is the bond's price? Round your answer to the nearest cent.

Answer 1

Using the bond pricing formula:

PV = (C / r) x [1 - 1 / (1 + r)^n] + FV / (1 + r)^n

Where:

PV = present value or price of the bond

C = coupon payment

r = yield to maturity (YTM) / required rate of return

n = number of periods (in this case, semiannual periods)

FV = face value or par value of the bond

Plugging in the given values:

C = $35 (since coupon is semiannual, $70 per year divided by 2)

r = 4.5% (since YTM is 9%, and it's a semiannual bond, divide by 2)

n = 36 (since there are 18 years to maturity, and it's a semiannual bond, multiply by 2)

FV = $1,000

PV = (35 / 0.045) x [1 - 1 / (1 + 0.045)^36] + 1000 / (1 + 0.045)^36

PV = $876.67

Therefore, the bond's price is $876.67.