Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere...

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, 25 years to maturity, and a coupon rate of 7.1 percent paid annually. If the yield to maturity is 8.2 percent, what is the current price of the bond?

Solutions

Expert Solution

Current price of the Bond

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value. The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

Here, the calculation of the Bond Price using financial calculator is as follows


Variables	Financial Calculator Keys	Figures

Face Value [-€1,000]	FV	-1,000
Coupon Amount [€1,000 x 7.10% x ½]	PMT	35.50
Market Interest Rate or Required Rate of Return [8.20% x ½]	1/Y	4.10
Time to Maturity [25 Years x 2]	N	50
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = €883.84.

“Therefore, the Current Price of the Bond will be €883.84”

jeff jeffy answered 3 months ago

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