Question

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, 10 years to maturity, and a coupon rate of 6.4 percent paid annually. If the yield to maturity is 7.5 percent, what is the current price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

	CALCULATION OF THE PRESENT VALUE OF THE BOND
	Step 1 : Calculation of Annual Coupon Payments
	Par value of the bond issued is   =			$                   1,000
	Annual Coupon %			6.40%
	Annual Coupon Amount			$                         64
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 10 years
	Step 3 : Yield to Maturity = 7.5%, So discount rate = 7.5%
	PVF = 1 / Discount rate = 1/ 1.075
	Result of above will again divide by 1.075 , repeat this till last period
	Option 1= Life of the bond is 10 years
	CALCULATION OF CURRENT MARKET PRICE OF THE BOND OR PURCHASE PRICE
	Years	Interest	Amount	PVF @ 7.5%	PresentValue
	1	Interest	$                          64	0.9302	$               59.53
	2	Interest	$                          64	0.8653	$               55.38
	3	Interest	$                          64	0.8050	$               51.52
	4	Interest	$                          64	0.7488	$               47.92
	5	Interest	$                          64	0.6966	$               44.58
	6	Interest	$                          64	0.6480	$               41.47
	7	Interest	$                          64	0.6028	$               38.58
	8	Interest	$                          64	0.5607	$               35.88
	9	Interest	$                          64	0.5216	$               33.38
	10	Interest	$                          64	0.4852	$               31.05
	10	Bond Value	$                    1,000	0.4852	$             485.19
		Total			$             924.50
		Current price of the Bond =		$                924.50
	SIMULTANEOUSLY WE CAN SOLVE WITH BELOW METHOD
	OR		Cumulative value of $ 1 @ 7.5% in 10 Years
	Interest	$64.00	6.8641	439.30
	Par Value at 30th Period	$1,000	0.4852	485.19
	Current Bonds Price			924.50