Question

AZ company's bonds mature in 9 years, offer an annual 7% coupon rate, make semi-annual payments and have a yield to maturity of 8% What is the market value per bond considering the face of $1,000

Answer 1

The market value is computed as shown below:

The coupon payment is computed as follows:

= 7% / 2 x $ 1,000 (Since the payments are semi annually, hence divided by 2)

= $ 35

The YTM will be as follows:

= 8% / 2 (Since the payments are semi annually, hence divided by 2)

= 4% or 0.04

N will be as follows:

= 9 x 2 (Since the payments are semi annually, hence multiplied by 2)

= 18

So, the price of the bond is computed as follows:

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

= $ 35 x [ [ (1 - 1 / (1 + 0.04)¹⁸ ] / 0.04 ] + $ 1,000 / 1.04¹⁸

= $ 35 x 12.65929697 + $ 493.628121

= $ 936.70 Approximately

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