Question

Bond Pricing:

a. What price would you be willing to pay for a bond with $120 annual coupon and that sells for 900 at the end of five years

b. What is the current yield for that bond

Answer 1

The discount rate is important here, which is not given in the sum. Hence, it is assumed that the discount rate is 10% or 0.10.

Table

Year	CF	F = 1/1.10^year	PV = CF × F
1	120	1/1.10^1 = 0.90909	120 × 0.90909 = 109.09
2	120	1/1.10^2 = 0.82644	99.17
3	120	1/1.10^3 = 0.75131	90.16
4	120	1/1.10^4 = 0.68301	81.96
5	900 + 120 = 1020	1/1.10^5 = 0.62092	633.34
			Total = 1,013.72

Price is $1,013.72 (Answer)

Current yield = (Coupon amount / Price) × 100

                        = (120 / 1,013.72) × 100

                        = 12000 / 1013.72

                        = 11.84%