A General Motors bond (face value of $1,000) carries a coupon rate of
8 percent, has 9 years until maturity, and sells at a yield to
maturity of 9 percent.

a. What interest payments do bondholders receive each year?
b. At what price does the bond sell? (Assume annual interest payments.)
c. What will happen to the bond price if the yield to maturity falls to 7 percent?

Hi Missmallprincess, 

In order:

a) The interest payment is the coupon rate (c) as a percentage of the
bond's par value ($1000).

c = 8% = 0.08
B = $1000
Interest payment = c*B = $80

b) The bond price is calculated by:

c = annual coupon payment = $80
B = par value = $1000
n = years to maturity = 9
r = rate of return (yield to maturity, the composite rate of return
off all payouts, both coupon and capital gain) = 9% = 0.09
P = price

c(1 + r)^-1 + c(1 + r)^-2 + ... + c(1 + r)^-n + B(1 + r)^-n = P

80*1.09^-1 + 80*1.09^-2 + ... + 80*1.09^-9 + 1000*1.09^-9 = $940

c) If the yield to maturity falls then we can just calculate the same
thing again using a new value for (r), now 0.07.

80*1.07^-1 + 80*1.07^-2 + ... + 80*1.07^-9 + 1000*1.07^-9 = 1065.95

You can find out more about this at this site:
http://www.moneychimp.com/articles/finworks/fmbondytm.htm

You may also want to check out the bond price calculator here:
http://www.prenhall.com/divisions/bp/app/cfldemo/BV/BondPrice.html and
the bond yield-to-maturity calculator here:
http://www.prenhall.com/divisions/bp/app/cfldemo/BV/YTM.html

I hope this helped you out.

Hibiscus