Question

You are currently holding a corporate bond. It has a remaininglife of exactly 25 years till maturity. It has a coupon rate of 4.5%(nominal rate compounded semi-annually) and a face value of $1,000.Currently the market is demanding a nominal rate of 6% compoundedsemi-annually on bonds with similar risk and maturity date.A)If you are thinking of selling the bond today, what is the

Answer 1

The current value of the Bond is $807.03

Step-by-step explanation:

The price of the bond can be calculated by taking the present values of all cash flows of the bond. These cash flows include the coupon payment and the maturity payment of the bond.

According to the given data

Face value of the bond = F = $1,000

Coupon payment = C = $1,000 x 4.5% x 6/12 = $22.5 Semiannually

Number of periods = n = 25 years x 2 = 50 period s

YTM = 6% / 2 = 3%

Price of the bond is calculated by using following formula:

Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]

Placing all the available values in the formula

Price of the Bond = $22.5 x [ ( 1 - ( 1 + 3% )^-50 ) / 3% ] + [ $1,000 / ( 1 + 3% )^50 ]

Price of the Bond = $578.92 + $228.11

Price of the Bond = $807.03