Question

Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company's bonds be priced at today

Answer 1

Price of a bond = $1065.792

Step-by-step explanation:

Given:

• Coupon rate: 8.25% => Coupon payment: 1000*8.25% =82.5 (C)
• YTM = 6.875%
• n = six-year

Price of a bond = PV of Interest payment + PV of RV

• PV of Interest payment : C(1- (1+r)^(-n)/r

<=> 82.5× (1-(1.06875)^(-6))/0.06875 = 394.76

• PV of RV ( Redemption value)

<=> PV of RV = RV ×
`(1+r)^(-n)`

<=> PV of RV = 1000 ×
`(1+0.06875)^(-6)` = 671.032

So we have:

Price of a bond = 394.76 + 671.032 = $1065.792