Question

Tyson Corporation has an outstanding issue of 25-year maturity corporate bond with face value of $1,000 and a coupon of 4%, paying coupon interest semi-annually. If the market rate of interest (YTM) is 6% on similar risk bonds, at what price would this bond trade in the market.

Answer 1

The price of the bond is computed as shown below:

The coupon payment is computed as follows:

= 4% / 2 x $ 1,000 (Since the payments are semi annual, hence divided by 2)

= $ 20

The YTM will be as follows:

= 6% / 2 (Since the payments are semi annual, hence divided by 2)

= 3% or 0.03

N is computed as follows:

= 25 x 2 (Since the payments are semi annual, hence multiplied by 2)

= 50

So, the price of the bond will be as follows:

= Coupon payment x [ [ (1 - 1 / (1 + r)ⁿ ] / r ] + Par value / (1 + r)ⁿ

= $ 20 x [ [ (1 - 1 / (1 + 0.03)⁵⁰ ] / 0.03 ] + $ 1,000 / 1.03⁵⁰

= $ 20 x 25.72976401 + $ 228.1070798

= $ 742.70 Approximately

Feel free to ask in case of any query relating to this question