Question

Leo Inc. has a bond with a 6 percent annual coupon (coupon is paid in semiannual installments) and a yield to maturity of 5 percent. If the bond matures in 20 years, what is the bond worth?

Answer 1

Bond worth is $ 1,125.51

Working:

a.
Semi annual coupon interest			=	6%/2	=	3%
Semi annual yield to maturity			=	5%/2	=	2.5%
Semi annual period			=	20*2	=	40
b.
Present value of coupon interest				$ 30	x	25.1028	=	$     753.08
Present Value of Par Value				$       1,000	x	0.3724	=	$     372.43
Present value of cash flow								$ 1,125.51
So, bond worth is		$ 1,125.51
Working:
Semi annual coupon interest			=	$       1,000	x	3%	=	$ 30
Par Value								$       1,000
Cumulative discount factor			=	(1-(1+i)^-n)/i			Where,
			=	(1-(1+0.025)^-40)/0.025			i	2.5%
			=	25.1028			n	40
Discount factor for 40th period			=	1.025^-40
			=	0.3724