A $1,000 face value bond currently has a yield to maturity of 6.25 percent. The bond...

A $1,000 face value bond currently has a yield to maturity of 6.25 percent. The bond matures in 3 years and pays interest annually. The coupon rate is 7 percent. What is the current price of this bond?

Expert Solution

Annual coupon=1000*7%=70

Hence current price=Annual coupon*Present value of annuity factor(6.25%,3)+1000*Present value of discounting factor(6.25%,3)

=70*2.66069611+1000*0.833706493

=$1019.96(Approx)

NOTE:

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

=70[1-(1.0625)^-3]/0.0625

=70*2.66069611

2.Present value of discounting factor=1000/1.0625^3

=1000*0.833706493

jeff jeffy answered 2 years ago

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