Question

Comco Inc issued bonds that have a 8.5% coupon rate, payable semiannually. The bonds mature in 12 years, have a $1,000 face value and a 12% yield to maturity.

1.. What is the price of the bonds?

2. Exactly two years later, you observe the bonds trading at $925, what is the yield to maturity?

Answer 1

a.Information provided:

Face value= future value= $1,000

Time= 12 years*2= 24 semi-annual periods

Yield to maturity= 12%/2= 6% per semi-annual period

Coupon rate= 8.5%/2= 4.25% per semi-annual period

Coupon payment= 0.0425*1,000= $42.50

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

N= 24

I/Y= 6

PMT= 42.50

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

The value obtained is 780.3687.

Therefore, the current price of the bond is $780.37.

b. Information provided:

Face value= future value= $1,000

Time= 14 years*2= 28 semi-annual periods

Coupon rate= 8.5%/2= 4.25% per semi-annual period

Coupon payment= 0.0425*1,000= $42.50

Current price= present value= $925

Enter the below in a financial calculator to compute the yield to maturity:

FV= 1,000

PV= -925

N= 28

PMT= 42.50

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 4.7392.

Therefore, the yield to maturity is 4.7392%*2= 9.4785% 9.48%.

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