Question

Suppose that General Motors Acceptance Corporation issued a bond with 10 years until​ maturity, a face value of

$1,000​,

and a coupon rate of

7.2%

​(annual payments). The yield to maturity on this bond when it was issued was

5.7%.

Assuming the yield to maturity remains​ constant, what is the price of the bond immediately before it makes its first coupon​ payment?

Answer 1

Value of bond immediately before the payment of first coupun will be = First coupon + Value of bond immediately after paying first coupon.

First coupon = 7.2%of 1000= 72

Value of bond immediately after First coupon (at 5.7 yield) is given as

Years	Coupon	Principal	Total Cash flow	Discounting factor at 5.7%	Present value of cash flows
N	A= 7.2% of 1000	B	C=A+B	D=1/(1+5.7%)^N	E= D*C
1	72	0	72	0.946073794	68.11731315
2	72	0	72	0.895055623	64.44400487
3	72	0	72	0.846788669	60.96878417
4	72	0	72	0.801124569	57.68096894
5	72	0	72	0.75792296	54.57045312
6	72	0	72	0.71705105	51.62767561
7	72	0	72	0.678383207	48.84359092
8	72	0	72	0.641800575	46.20964137
9	72	1000	1072	0.607190704	650.9084351
				Total	1103.370867

Hence value of bodn immediately before first payment = 72+ 1103.37= 1175.37