Question

In: Finance

Staind, Inc., has 6 percent coupon bonds on the market that have 6 years left to...

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

Solutions

Expert Solution

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.


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