Question

Bigbie Corp. issued a three-year bond a year ago with a coupon of 8 percent. The bond pays interest semiannually. If the yield to maturity on this bond is 8.9 percent, what is the price of the bond? Round your answer to 2 decimal places.

Answer 1

price of the bond = [present value of annuity factor * interest payments] + [present value factor * face value]

present value of annuity factor = [1 -(1+r)^(-n)]/r

here,

r=8.9% per annum =>4.45%.=>0.0445.

n = 2 years remaining * 2 semi annual periods =>4.

=>[1-(1.0445)^(-4)]/0.0445

=>[1-0.84016817]/0.0445.

=>3.59172584.

interest payment = $1000*8%*6/12

=>$40

present value factor = 1 /(1+r)^n

=>1/(1.0445)^4

=>0.84016817.

face value = $1000.

price of the bond = [3.59172584*40] + [0.84016817*1000]

=>143.669034+840.17

=>$983.84.