Bond value

Answer: 

a.The current price of bond with YTM 6 percent is $1458.80

b.The current price of bond is with YTM 9 percent is $1091.29

c.The current price of bond is with YTM 13 percent is $ 789.26

Calculation of the price of bond:

For calculating the price of bond, the present value of its interest or coupon payment is considered. The present value of interest payment is calculated with the help of YTM rate. The present value of redemption amount is also calculated. The price of the bond is then calculated by adding both present value of interest payments and redemption value. This is known as cash flow method.

1. Coupon rate = 10 % and coupon payments = 10% *$1000= $100
2. Present value of interest payment with 6 percent yield= =100/1.06+100/1.06^2+100/1.06^3+100/1.066^4+100/1.06^5+100/1.06^6+100/1.06^7+100/1.06^8+100/1.06^9+100/1.06^10+100/1.06^11+100/1.06^12+100/1.06^13+100/1.06^14+100/1.06^15+100/1.06^16+100/1.06^17+100/1.06^18+100/1.06^19+100/1.06^20= $1145.22
3. Present value of redemption amount =1000/1.06^20=$311.804
4. Total price of bond = A+B = $1145.22+ $ 311.804 =$1458 (approx.)

The other prices are calculated with the same formula by changing the YTM percent as 9 percent and 13 percent.