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Q: Bond Selling Price ( Answered 5 out of 5 stars,   0 Comments )
Question  
Subject: Bond Selling Price
Category: Business and Money > Finance
Asked by: gofigure99-ga
List Price: $5.00
Posted: 23 Jan 2005 17:47 PST
Expires: 22 Feb 2005 17:47 PST
Question ID: 462215
A company just issued a bond that has a face value of $1000 and a
coupon rate of 7%.  If the bond has a life of 30 years pays annual
coupons and the YTM is 6.8% what will the bond sell for?
Answer  
Subject: Re: Bond Selling Price
Answered By: elmarto-ga on 23 Jan 2005 19:38 PST
Rated:5 out of 5 stars
 
Hi gofigure99!
We know that this bond will pay $70 at the end of each year, because
its face value is $1000 and the coupon rate is 7% (so 7% of $1000 is
$70).

The definition of Yield To Maturity is the following:

"the market interest rate that equates a bond's present value of
interest payments and principal repayment with its price."

Yield to Maturity
http://www.investopedia.com/terms/y/yieldtomaturity.asp

So, calling "i" to the YTM (in your case, i=0.068), we get the
follwing equation for the bond price (which we'll call P)

P = 70/(1+i) + 70/(1+i)^2 + 70/(1+i)^3 + ... + 70/(1+i)^30 + 1000/(1+i)^30

That is the bond price is the present value (discounted using the YTM)
of all the coupon payments plus the payment of the face value of the
bond at the bond's maturity (in 30 years).

You could calculate the value of P manually, summing each term, but it
would clearly take a long time. Fortunately, there are many on-line
bond calculators that will find this number. You can find one at:

Bond Price Calculator
http://www.investopedia.com/calculator/BondPrice.aspx

In order to solve your problem, you should enter:

Par Value: 1000
Settlement Date: Any date (for example, today, 1/24/2005)
Maturity Date: Any date + 30 years (for example, 1/24/2035)
Annual rate: 7
Yield: 6.8
Redemption Value: 1000
Payments: Annualy

So the answer you'll get is that the bond will sell for $1025.32.


Google search terms:
yield to maturity
://www.google.com.ar/search?hl=es&q=yield+to+maturity&meta=
bond price calculator
://www.google.com.ar/search?hl=es&q=bond+price+calculator&meta=


I hope this helps!
Best wishes,
elmarto
gofigure99-ga rated this answer:5 out of 5 stars

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