Question

1) A $1,000 face value bond currently has a yield to maturity of 6.03 percent. The bond matures in thirteen years and pays interest semiannually. The coupon rate is 6.25 percent. What is the current price of this bond?

2) The $1,000 face value bonds of Galaxies International have coupon of 5.5 percent and pay interest semiannually. Currently, the bonds are quoted at 98.02 and mature in 12 years. What is the yield to maturity?

3) Variance Logistics wants to issue 20-year, zero-coupon bonds that yield 6.2 percent. What price should it charge for these bonds if the face value is $1,000? Assume semiannual compounding.

Answer 1

Answer to Question 1:

Face Value = $1,000

Annual Coupon Rate = 6.25%
Semiannual Coupon Rate = 3.125%
Semiannual Coupon = 3.125% * $1,000
Semiannual Coupon = $31.25

Annual YTM = 6.03%
Semiannual YTM = 3.015%

Time to Maturity = 13 years
Semiannual Period = 26

Current Price = $31.25 * PVIFA(3.015%, 26) + $1,000 * PVIF(3.015%, 26)
Current Price = $31.25 * (1 - (1/1.03015)^26) / 0.03015 + $1,000 * (1/1.03015)^26
Current Price = $31.25 * 17.846022 + $1,000 * 0.461942
Current Price = $1,019.63

So, current price of this bond is $1,019.63