Question

1. Romer Inc. recently issued bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Answer 1

Par Value = $1000

Annual Coupon payment = $1000*5.5%

= $55

No of maturity (n) = 10

Current Market Interest rate (YTM)= 7%

Calculating the Current price of Bond:-

$Price = \frac{CouponPayment}{(1+YTM)^{1}}+\frac{CouponPayment}{(1+YTM)^{2}}+.....+\frac{CouponPayment}{(1+YTM)^{n}}+\frac{FaceValue}{(1+YTM)^{n}}$

$Price = \frac{55}{(1+0.07)^{1}}+\frac{55}{(1+0.07)^{2}}+.....+\frac{55}{(1+0.07)^{10}}+\frac{1000}{(1+0.07)^{10}}$

Price =$386.298 + $508.35

Price = $894.65

So, the Price of Bond should sell is $894.65

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