Question

A $1000 face value bond currently has a yield to maturity of 6.69%. The bond matures in three years and pays interest annually. The coupon rate is 7%. What is the current price of this bond?

Answer 1

Current Price of the Bond

The Current Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Par Value of the bond = $1,000

Annual Coupon Amount = $70 [$1,000 x 7%]

Annual Yield to Maturity = 6.69%

Maturity Period = 3 Years

The Current Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $70[PVIFA 6.69%, 3 Years] + $1,000[PVIF 6.69%, 3 Years]

= [$70 x 2.63925] + [$1,000 x 0.82343]

= $184.75 + $823.43

= $1,008.18

“Hence, the Current Price of the Bond will be $1,008.18”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.