Question

Suppose that Ally Financial Inc. issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%.

a. What was the price of this bond when it was issued?

b. Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?

c. Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?

Answer 1

A. The price will be = 1000 x (0.07/1.06 + 0.07/1.06^2 + 0.07/1.06^3 + 0.07/1.06^4 + 0.07/1.06^5 + 0.07/1.06^6 + 0.07/1.06^7 + 0.07/1.06^8 + 0.07/1.06^9 + 1.07/1.06^10) = 1073.6

B. The price will be = 1000 x (0.07 + 0.07/1.06 + 0.07/1.06^2 + 0.07/1.06^3 + 0.07/1.06^4 + 0.07/1.06^5 + 0.07/1.06^6 + 0.07/1.06^7 + 0.07/1.06^8 + 1.07/1.06^9) =1138.017

C. The price in this case will be simply the price in B minus the coupon payment = 1138.017 - 70 = 1068.017