A company’s bonds have a 15-year maturity, a 6% coupon rate paid semi-annually, and a par...

A company’s bonds have a 15-year maturity, a 6% coupon rate paid semi-annually, and a par value of $1000. The nominal yield is quoted as 6% in the financial press. What is the bond’s price?

Solutions

Expert Solution

Price of the Bond

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

Face Value of the bond = $1,000

Semi-annual Coupon Amount = $30 [$1,000 x 6.00% x ½]

Semi-annual Yield to Maturity = 3.00% [6.00% x ½]

Maturity Period = 30 Years [15 Years x 2]

Therefore, the Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $30[PVIFA 3.00%, 30 Years] + $1,000[PVIF 3.00%, 30 Years]

= [$30 x 19.60044] + [$1,000 x 0.41199]

= $588.01 + $411.99

= $1,000.00

“The Bond Price will be $1,000.00”

If the Coupon rate of the Bond (6.00%) is equal to the Yield to maturity of the Bond (6.00%) of the Bond, then the Price of the bond will be equal to the Par Value of the Bond ($1,000)

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.

jeff jeffy answered 5 months ago

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