Question

Homework: Chapter 7. Learning Objective 4. Topic Homework 2 save Score: 0 of 1 pt 4 of 5 (0 complete) HW Score: 0%, 0 of 5 pts Problem 7.L04.26 (similar to) Question Help A Ford Motor Co. coupon bond has a coupon rate of 6.8%, and pays annual coupons. The next coupon is due tomorrow and the bond matures 28 years from tomorrow. The yield on the bond issue is 6.1%. At what price should this bond trade today, assuming a face value of $1,000? The price of the bond today should be $ (Round to the nearest cent.) Enter your answer in the answer box and then click Check Answer. All parts showing Clear All Check Answer

Answer 1

Given for Ford Motor Co.

6.8% annual paying coupon bond, with face value of $1000 & yield to maturity of 6.1%

Next coupon is due tomorrow, and time to maturity is 28 years,

So, bond will pay 28 coupon of $68 every year, and at the end of year 28, it will also pay Face Value.

So price of the bond is Sum of all coupons and principal discounted at YTM.

So price today = 68 + 68/1.061 + 68/1.061^2 + 68/1.061^3 + ... + 68/1.061^27 + 68/1.061^28 + 1000/1.061^28

using formula for sum of a GP S = a(1-r^n)/(1-r)

here a = 68, r = 1/1.061 and n = 29

we get Price today = 68*(1 - (1/1.061^29))/(1 - (1/1.061) + 1000/1.061^28 = $1160.89