In: Finance
What is the market value of a bond with 20 years left to maturity, a coupon payment of $35 every 6 months, and a $1,000 face value if the yield to maturity is 5%?
The price of the bond can be calculated as follows:
Price of bond = Coupon * (1 - (1 + R)^-N)/R + FV/(1+R)^N
where Coupon = 35
R = 5%/2 = 2.50%
FV = 1000
N = 20 * 2 = 40
Price = 35*((1-(1+0.025)^-40)/0.025+1000/(1+0.025)^40
= 35*25.102775 + 372.43
= 1251.03