A bond with 20 years until maturity has a coupon rate of 7.4 percent and a yield
ID: 2650094 • Letter: A
Question
A bond with 20 years until maturity has a coupon rate of 7.4 percent and a yield to maturity of 7.5 percent. What is the price of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
A bond with 20 years until maturity has a coupon rate of 7.4 percent and a yield to maturity of 7.5 percent. What is the price of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Explanation / Answer
In absence of specific information regarding face value of bond it is assumed for $ 1000.
It is also assumed that coupon payments are annual.
Price of bond= C/YTM [1- 1/(1+YTM)n] + FV/ (1+YTM)n
Here YTM= 7.5 %, n= 20 Years, C= 74 ( $ 1000 x .074)
Price of bond= 74/.075 x [1-1/(1.075)20] + 1000/ (1.075)20
Price of Bond= 750.03 + 239.84
Price of Bond= $ 989.87
Price of bond is nothing but present value of coupon payments received during the life of bond and face value received at the end of maturity period. If YTM is given it is used for discounting purpose
Price of Bond= $ 989.87
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