Question

Consider the following Nestle Inc bond: maturity: 10 years, coupon rate: 6% (paid semi-annually), face value: $1000. Your investment advisor has told you that the yield-to-maturity on this bond is 6.5%.

What should be the price of this bond?

Answer 1

Solution :

The Price of the bond of Nestle Inc. bond should be = $ 963.65

= $ 964 ( when rounded off to the nearest whole number )

Note :

1. Since Interest is payable half yearly and the no. of years to maturity is 10 years, the price per bond is calculated by converting 10 years into (10 * 2) = 20 half yearly periods

2. Thus, the Interest earned per period = $ 1000 * 6 % * (6/12) = $ 30

3. Since the Interest is paid semi annually the discount rate used is = 6.5 % * (6/12) = 3.25 %

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.