Even though most corporate bonds in the United States make coupon payments semia

Question

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 20 years to maturity, and a coupon rate of 7.8 percent paid annually.

If the yield to maturity is 8.9 percent, what is the current price of the bond? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 20 years to maturity, and a coupon rate of 7.8 percent paid annually.

Explanation / Answer

Answer:

Calculation of Current Price of Bond using YTM formula:

YTM = [C + (F-P)/n] / [(F+P)/2]

YTM = Semiannual YTM =8.9%/2 =4.45% = 0.0445

C= Semiannual Coupon Payment =1000*7.8%/2 = 39

F= Face value =1000

P =Price

n= Number of Semiannual to maturity = 20 years *2 = 40

Hence ,

0.0445 = [39 + (1000-P)/40] / [(1000+P)/2]

We get P =883.60

Hence Current Price of the Bond is 883.60

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.