Question

A bond offers a coupon rate of 6%, paid annually, and has a maturity of 6 years. If the current market yield is 7% (discount rate), what should be the price of this bond? Enter your answer in dollars, without the dollar sign ('$'), and rounded to the nearest cent (2 decimals).

Answer 1

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

Annual Coupon Amount = $60 [$1,000 x 6%]

Annual Yield to Maturity of the Bond = 7%

Maturity Period = 6 Years

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

= $60[PVIFA 7%, 6 Years] + $1,000[PVIF 7%, 6 Years]

= [$60 x 4.76654] + [$1,000 x 0.66634]

= $285.99 + $666.34

= $952.33

“Hence, the Price of the Bond will be $952.33”

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.