Question

Boomer Inc, just issued 11-year bonds with $1,000 par and a 4.25% semi-annual coupon priced at $1080. If the yield to maturity stays constant, what will be the price of the bonds in 4 years?

Answer 1

At the time of issue,

No of semi-annual coupon payments pending till maturity (N) = 22 {11 years x 2}

Semi-annual coupon payment (PMT) = $1000 x 4.25% / 2 = $ 21.25

Future value of bond (FV) = $1,000

Price of bond (PV) = {-$1,080}

Semi-annual yield to maturity (Y) = ??

Using financial calculator or Rate function in excel,

Semi-annual yield to maturity (Y) = 1.687% per semi-annum

After 4 years,

No of semi-annual coupon payments pending till maturity (N) = 14 {7 years x 2}

Semi-annual coupon payment (PMT) = $1000 x 4.25% / 2 = $ 21.25

Future value of bond (FV) = $1,000

Semi-annual yield to maturity (I) = 1.687% per semi-annum {Since it is given that yield to maturity remained constant}

Price of bond (PV) = ??

Using financial calculator or PV function in excel,

Price of Bond (PV) = $ 1,054.25

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