Question

A Ford Motor Company coupon bond has a coupon rate of 6.75%, and pays annual coupons. The next coupon is due tomorrow and the bond matures 39 years from tomorrow. The yield on the bond issue is 6.25%. At what price should this bond trade today, assuming a face value of $1,000?

Answer 1

Bond price= present value future interest payments plus principle repayment

	Particulars	Cash flow	Discount factor	Discounted cash flow
	Interest payments-Annuity (6.25%,39 periods)	67.5	14.4958	978.47
	Interest payment tomorrow	67.5	1.0000	67.50
	Principle payments -Present value (6.25%,39 periods)	1,000	0.0940	94.01
A	Bond price			1,139.98
	Face value			1,000
	Premium/(Discount)			139.98
	Interest amount:
	Face value	1,000
	Coupon/stated Rate of interest	6.75%
	Frequency of payment(once in)	12 months
B	Interest amount	1000*0.0675*12/12=		67.5
	Present value calculation:
	yield to maturity/Effective rate	6.25%
	Effective interest per period(i)	0.0625*12/12=		6.25%
	Number of periods:
Ref	Particulars	Amount
a	Number of interest payments in a year	1
b	Years to maturiy	39
c=a*b	Number of periods	39