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, 25 years to maturity, and a coupon rate of 7.9 percent paid annually.

Required:
(a) If the yield to maturity is 8.6 percent, what is the current price of the bond? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Answer 1

Current price of the bond $928.95

Step-by-step explanation:

Th price of the bond is the same as the present value of the bond today which is given by the below excel formula:

=pv(rate,nper,pmt,fv)

rate is the yield to maturity on the bond of 8.6%

nper is the tenor of the bond which is 25 years

pmt is the coupon interest payable annually by the bond which is 7.9%*1000=79

fv is the future value repayable on redemption which is 1000 euros

=pv(8.6%,25,79,-1000)

pv=$928.95

The current price of the bond is $928.95 as computed using the present value formula in excel