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, 10 years to maturity, and a coupon rate of 6.4 percent paid annually. If the yield to maturity is 7.5 percent, what is the current price of the bond?

Answer 1

Price of bond = $ 924.50

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 price of the bond can be worked out as follows:

Step 1

PV of interest payments

annul interest payment = 6.4 % × 1,000 = 64

Annual yield = 7.5%

Total period to maturity (in years) =10

PV of interest =

64 × (1- (1.075)^(-10)/)/0.075= 439.30

Step 2

PV of Redemption Value

= 1,000× (1.075)^(-10) = 485.19

Step 3

Price of bond

439.30 + 485.19 =$924.49

Price of bond = $ 924.50