Question

A General Power bond carries a coupon rate of 8.9%, has 9 years until maturity, and sells at a yield to maturity of 7.9%. (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 6.9%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

a. Interest received = coupon rate*par value = 8.9*1000/100=89

b.

K = N

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

k=1

K =9

Bond Price =∑ [(8.9*1000/100)/(1 + 7.9/100)^k]     +   1000/(1 + 7.9/100)^9

k=1

Bond Price = 1062.73

c.

K = N

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

k=1

K =9

Bond Price =∑ [(8.9*1000/100)/(1 + 6.9/100)^k]     +   1000/(1 + 6.9/100)^9

k=1

Bond Price = 1130.86

BOnd price increased by 1130.86-1062.73=68.13