Question

Microhard has issued a bond with the following characteristics:

Par: $1,000

Time to maturity: 20 years

Coupon rate: 7 percent

Semiannual payments

Calculate the price of this bond if the YTM is

a. 7%

b. 9%

c. 5%

Answer 1

a.Information provided:

Par value= future value= $1,000

Time= 20 years*2= 40 semi-annual periods

Coupon rate= 7%/2= 3.5%

Coupon payment= 0.035*1,000= $35

Yield to maturity= 7%/2= 3.5%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 35

I/Y= 3.5

N= 40

Press the CPT key and PV to compute the present value.

The value obtained is 1,000.

Therefore, the price of the bond is $1,000.

b.Information provided:

Par value= future value= $1,000

Time= 20 years*2= 40 semi-annual periods

Coupon rate= 7%/2= 3.5%

Coupon payment= 0.035*1,000= $35

Yield to maturity= 9%/2= 4.5%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 35

I/Y= 4.5

N= 40

Press the CPT key and PV to compute the present value.

The value obtained is 815.98.

Therefore, the price of the bond is $815.98.

c.Information provided:

Par value= future value= $1,000

Time= 20 years*2= 40 semi-annual periods

Coupon rate= 7%/2= 3.5%

Coupon payment= 0.035*1,000= $35

Yield to maturity= 5%/2= 2.5%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 35

I/Y= 2.5

N= 40

Press the CPT key and PV to compute the present value.

The value obtained is 1,251.03.

Therefore, the price of the bond is $1,251.03.

In case of any query, kindly comment on the solution.