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, 11 years to maturity, and a coupon rate of 7 percent paid annuallly. If the yield to maturity is 11 percent, what is the current price of the bond?

Answer 1

The current price of the bond = $751.74

Step-by-step explanation:

The current price of the bond is the present value of the face value of the bond and the coupon payments that will be made on the bond till maturity, that will be treated as an annuity. The formula for the present value or current price of the bond is,

Present Value of bond = Face value / (1+r)^n + PMT * [ 1-(1+r)^-n / r]

Where,

• r is the market interest rate or yield to maturity
• n is the number of years to maturity for an annual bond
• PMT is the coupon payment or interest payment per year for an annual bond

PMT = 1000 * 0.07 = 70

Present Value of bond = 1000 / (1+0.11)^11 + 70 * [ 1-(1+0.11)^-11 / 0.11]

Present value of bond = $751.739 rounded off to $751.74