A General Power bond with a face value of $1,000 carries a coupon rate of 9.7%,
ID: 2613167 • Letter: A
Question
A General Power bond with a face value of $1,000 carries a coupon rate of 9.7%, has 9 years until maturity, and sells at a yield to maturity of 8.7%. (Assume annual interest payments.)
At what price does the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What will happen to the bond price if the yield to maturity falls to 7.7%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
A General Power bond with a face value of $1,000 carries a coupon rate of 9.7%, has 9 years until maturity, and sells at a yield to maturity of 8.7%. (Assume annual interest payments.)
Explanation / Answer
a. Interest Payment each year = 1000*9.7% = $97
b. Price of the bond is the present value of future cash inflows using YTM as the discounting rate.
Present Value = [97*Cumulative PVF @ 8.7% for 9 years] + [1000*PVF for 9th year]
= [97*6.069] + [1000*0.472]
= $1060.69
c. Price of the Bond = [97*Cumulative PVF @ 7.7% for 9 years] + [1000*PVF for 9th year]
= [97*6.326] + [1000*0.513]
= $1126.62
Price will rise by $65.93
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