Suppose that Ally Financial Inc. issued a bond with 10 years until maturity, a f
ID: 2818785 • Letter: S
Question
Suppose that Ally Financial Inc. issued a bond with 10 years until maturity, a face value of $1,000 and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6 %.
a. What was the price of this bond when it was issued? (round to the nearest cent).
b. Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?
c. Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?
Explanation / Answer
Answer a.
Face Value = $1,000
Annual Coupon Rate = 7%
Annual Coupon = 7% * $1,000
Annual Coupon = $70
Time to Maturity = 10 years
Annual YTM = 6%
Price of Bond = $70/1.06 + $70/1.06^2 + $70/1.06^3 + ... + $70/1.06^10 + $1,000/1.06^10
Price of Bond = $70 * (1 - (1/1.06)^10) / 0.06 + $1,000 / 1.06^10
Price of Bond = $1,073.60
Answer b.
Face Value = $1,000
Annual Coupon Rate = 7%
Annual Coupon = 7% * $1,000
Annual Coupon = $70
Time to Maturity = 10 years
Annual YTM = 6%
Price of Bond = $70 + $70/1.06 + $70/1.06^2 + $70/1.06^3 + ... + $70/1.06^9 + $1,000/1.06^9
Price of Bond = $70 * 1.06 * (1 - (1/1.06)^10) / 0.06 + $1,000 / 1.06^9
Price of Bond = $1,138.02
Answer b.
Face Value = $1,000
Annual Coupon Rate = 7%
Annual Coupon = 7% * $1,000
Annual Coupon = $70
Time to Maturity = 10 years
Annual YTM = 6%
Price of Bond = $70/1.06 + $70/1.06^2 + $70/1.06^3 + ... + $70/1.06^9 + $1,000/1.06^9
Price of Bond = $70 * (1 - (1/1.06)^9) / 0.06 + $1,000 / 1.06^9
Price of Bond = $1,068.02
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.