Question

A General Power bond carries a coupon rate of 9.4%, has 9 years until maturity, and sells at a yield to maturity of 8.4%. (Assume annual interest payments.)

a. What interest payments do bondholders receive each year?

Interest payments:______

b. At what price does the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price:_________

c.What will happen to the bond price if the yield to maturity falls to 7.4%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price will ______ by ______

Answer 1

a

Interest = coupon rate*par value = 0.094*1000=94

b

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =9

Bond Price =∑ [(9.4*1000/100)/(1 + 8.4/100)^k]     +   1000/(1 + 8.4/100)^9

k=1

Bond Price = 1061.44

c

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =9

Bond Price =∑ [(9.4*1000/100)/(1 + 7.4/100)^k]     +   1000/(1 + 7.4/100)^9

k=1

Bond Price = 1128.12