Suppose that you just purchased a Baa rated $1000 annual coupon bond with an 9.6 %...

Suppose that you just purchased a Baa rated $1000 annual coupon bond with an 9.6 % coupon rate and a 11 -year maturity. If the yield to maturity on the bond is 3.479 %, how much did you pay?

Expert Solution

Annual coupon=1000*9.6%=96

Hence current price=Annual coupon*Present value of annuity factor(3.479%,11)+1000*Present value of discounting factor(3.479%,11)

=96*9.01189147+1000*0.686476296

=$1551.62(Approx)

NOTE:

1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=96[1-(1.03479)^-11]/0.03479

=96*9.01189147

2.Present value of discounting factor=1000/1.03479^11

1000*0.686476296

jeff jeffy answered 2 years ago

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