Question

Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. what is the price?

Answer 1

$ 991.47

Working:

Present Value of coupon Payment

$        355.23

Present Value of Maturity Payment

$        636.24

Price of bond

$        991.47

Working:

i.Par Value of Bond

=

$          1,000

ii. Semi annual Coupon Payment

=

$          1,000

x

7.50%

x

6/12

=

$    37.50

iii. Present value of annuity of $ 1

=

(1-(1+i)^-n)/i

Where,

=

(1-(1+0.0384)^-12)/0.0384

i

7.68%/2

=

0.0384

=

9.4728

n

6*2

=

12

iv.Present Value of Coupon Interest

=

Coupon Payment x Present Value of annuity of $ 1

=

$          37.50

x

9.4728

=

$        355.23

v.Present Value of $ 1

=

(1+i)^-n

=

(1+0.0384)^-12

=

0.6362

vi. Present Value of Par Value

=

Par Value at the time of maturity x Present Value of $ 1

=

$          1,000

x

0.6362

=

$       636.24