Question

Great Wall Pizzeria issued 18-year bonds one year ago at a coupon rate of 5.1 percent. If the YTM on these bonds is 8.6 percent, what is the current bond price? Note: Corporate bonds pay coupons twice a year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Since the face value of bond is not given in the question it is assumed to be $1000. The bond is issued 1 year ago, so there is 17 years remaing to mejurity.

we can calculate the current price of bond by discounting the coupon payment for the remaining 17 years and the redumption proceeds of face value $1000, ie calculating the net present value as follows.

coupon payment = 1000 * 5.1% * 6/12 = $25.50

no of 6 months to mejurity = 17 * 2 = 34

redumption proceeds = $1000

cash flow in 34 th period =1000+25.50 =1025.50

discounting rate is YTm = 8.6 * 6/12 = 4.3%

So, the current bond price is 690.28

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