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 percent paid annually.

If the yield to maturity is 8.1 percent, what is the current price of the bond? (Do not round intermediate calculations and round your 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 percent paid annually.

Explanation / Answer

Par Value F = Euro 1000

Cupon = 7% paid annual

Cupon Amount C = Euro 70

Time to Maturity n = 20 years

Yield to Maturity i = 8.1% or 0.081

Current Prince of the Bond is calculated using the formula

P = C* {(1-(1/(1+i)^n}/i + F /(1+i)^n

P = 70 * {1-(1/1+0.081)^20}/0.081 + 1000/(1+0.081)^20

P = 70 * {1-(1/1.081)^20}/0.081 + 1000/(1.081)^20

P = 70 * { 1 - 1/4.74803}/0.081 + 1000/4.74803

P = 70 * (1 - 0.21061)/ 0.081 + 210.6137

P = 70 * (0.78939/0.081) + 210.6137

P = 70 * 9.7456 + 210.6137

P = 682.192 + 210.6137

P = 892.8057

Current Price of the Bond is Euro 892.81 (rounded off)

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