Question

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 23 years to maturity, and a coupon rate of 3.8 percent paid annually.

If the yield maturity is 3.7%, what is the current price of the bond?

Answer 1

Value of bond = €1,015.31

Step-by-step explanation:

We know,

Value of bond = [I ×
`(1 - (1 + r)^(-n))/(r)`] + [
`(FV)/((1+r)^(n))`]

Given,

Face Value, FV = €1,000

Coupon payment, I = FV × coupon rate

I = €1,000 × 3.8% = €38

Interest rate, r = 3.7% = 0.037

Putting the values into the above formula,

Value of bond = [€38 ×
`(1 - (1 + 0.037)^(-23))/(0.037)`] + (€1,000 ÷
`1.037^(23)`)

or, Value of bond = [€38 ×
`(1 - 0.433599)/(0.037)`] + €433.5993

or, Value of bond = (€38 × 15.3081) + €433.5993

or, Value of bond = €581.7088 + €433.5993

Therefore, Value of bond = €1,015.31