In: Finance
Staind, Inc., has 6 percent coupon bonds on the market that have 6 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 11 percent, what is the current bond price? |
$827.90
$749.05
$788.47
$1,249.87
$1,030.00
Coupon Rate = 6% per anum paid annually
Tenure of the Bond = 6 Years left to matuirty
Yield to Maturity = 11%
Face Value of the bond = 1000 $
(1) CALCULATION OF COUPON INTEREST
Coupon Interest = Principal Amount * Coupon Rate = 1000*6% = 60 $ per anum
(2) CALCULATION OF PRICE
we have to find the purchase price of the bond which can be found by using following formula
Price of the bond = C1/(1+YTM)^1 + C2/(1+YTM)^2 + C3/(1+YTM)^3 + ............ +Cn/(1+YTM)^n + MV/(1+YTM)^n
C = Coupon on the bond = 60 $
YTM = Yield to Matuirty= 11%
n = Number of periods = 6
MV = Maturity Value = 1000
Using Present Value Annuity we can find present value of all coupons as follows
Present Value Annuity = Coupon*{(1-(1/(1+YTM)^n))/YTM}
= 60{(1-(1/(1+(0.11))^6))/(0.11)}
= 60*4.2305
=253.8323
Present Value of Maturity Value = Maturity Value / (1+ YTM)^18 = 1000/(1+0.11)^6 = 534.6408
SInce maturity value is received only once at the end of 6 years it can be computed by using present value formula.
Therefore price of Bond = Present Value of all Coupons + Present Value of Maturity Value
= 253.8323 + 534.6408
= 788.4731$
Hence option C is the correct answer where bond price is 788.47$
Hence last option is the correct answer.