Question

Consider a bond with a coupon rate of 8% and coupons paid semi annually the par value is $1000 and the bond has 10 year to maturity the yield to maturity is 10% what is the value of the bond?

Answer 1

Coupon Interest rate =					8%
Coupons per year					2
Interest per coupon		(1000*8%*1/2) =			$40.00
YTM rate					10%
Semiannual YTM rate =					5%
No. of years					10
No. of periods (10 Years * 2)					20
Calculation of price of bond @ 5% YTM
Annual Interest received =				40.00
Cumulative P.V.F. @ 5 % for 20 periods=
(1- ((1/(1.05)^20)))/0.05				12.46221
Present value of interest received					$498.49
Maturity amount received =				1000
P.V.F. @ 5% for 20th period =
(1/(1+0.05)^20)				0.376889
Present value of Maturity amount					$376.89
Price of bond					$875.38
So, Price of bond is $875.38.