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 1000,20 years to maturity, and a coupon rate of 6.6 percent paid annually.

If the yield to maturity is 8.9 percent, what is the current price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Price of bond = $786.86

Step-by-step explanation:

The value of the bond is the present value(PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

Value of Bond = PV of interest + PV of RV

The value of bond would be worked out as follows:

Step 1

Calculate the PV of interest payments

Annual interest payment

= 6.6% × 1,000× 1/2= 33

PV of interest payment = A ×(1- (1+r)^(-n))/r

r- semi-annual yield = 8.9%/2 = 4.45 %

n- 20× 2= 40

PV of interest payment= 33 × (1-(1.0445^(-40)/0.0445 = 611.611

Step 2

PV of redemption Value

PV = RV × (1+r)^(-n)

PV = 1,000 × (1.0445)^(-40) = 175.25

Step 3

Price of bond

Price of bond= 611.611 + 175.25 = 786.862

Price of bond = $786.86