A company has a bond with a coupon rate of 8 percent, face value of $1000, 7 years to maturity, semiannual interest payments, and a YTM of 7 percent (compounded semiannually)

Finance Dec 26, 2020

A company has a bond with a coupon rate of 8 percent, face value of $1000, 7 years to maturity, semiannual interest payments, and a YTM of 7 percent (compounded semiannually).

a. What is the bond price?

b. What is the current yield on bond?

Expert Solution

A) No of periods (n) = Years * Frequency = 7*2=14

YTM (r) = 7%, since it is semiannual compounding divided by 2=> 7/2=3.5%

Coupon amount = Facevalue * Coupon rate / Frequemcy = 1000*8%/2=40

Price = (Coupon/r)*(1-(1+r)^-n) + Face value *(1+r)^-n

=(40/0.035)*(1-(1.035)^-14 + 1000*(1+0.035)^-14

=1142.85714286 * (1-0.61778179027) + 1000*0.61778179027

=436.820811121+617.78179027

PRICE= 1054.60260139

Rounding to two decimals =1054.60

B) Coupon amount = Facevalue * Coupon rate = 1000*8%=80

Current Yield = Annual Coupon amount/Price of bond

= 80/1054.60260139

Current Yield = 7.58579581489%

Rounding to two decimals = 7.59%

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