Question

A General Power bond carries a coupon rate of 8.8%, has 9 years until maturity, and sells at a yield to maturity of 7.8%. (Assume annual interest payments.) a. What interest payments do bondholders receive each year? b. At what price does the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. What will happen to the bond price if the yield to maturity falls to 6.8%

Answer 1

A)Let the face value of bond be $ 1000

Annual coupon received each year =Face value * coupon rate

                                  = 1000 *..088 = 88

B)Price = [PVA 7.8%,9* interest] +[PVF 7.8%,9* Face value]

      =[6.29918*88]+ [.50866*1000]

      = 554.33+ 508.66

     = 1062.99

c)With decrease in yield to maturity from 7.8% to 6.8% ,the bond price will increase since cash flows are discounted are lower rates.

new bond price =[[PVA 6.8%,9* interest] +[PVF 6.8%,9* Face value]

       = [6.57103*88]+[.55317*1000]

        = 578.25+ 553.17

        = 1131.42

**Find present value annuity factor(PVA ) and present value factor (PVF) using financial calculator or from table respectively.