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, 12 years to maturity, and a coupon rate of 7 percent paid annuallly. If the yield to maturity is 11 percent, what is the current price of the bond? |
Annual coupon=1000*7%=70
Hence current price=Annual coupon*Present value of annuity factor(11%,12)+1000*Present value of discounting factor(11%,12)
=70*6.49235615+1000*0.285840824
=740.31(Approx).
NOTE:
1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=70[1-(1.11)^-12]/0.11
=70*6.49235615
2.Present value of discounting factor=1000/1.11^12
=1000*0.285840824
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