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Q: Price of bonds ( Answered 5 out of 5 stars,   2 Comments )
Question  
Subject: Price of bonds
Category: Business and Money > Finance
Asked by: gofigure99-ga
List Price: $4.00
Posted: 23 Jan 2005 20:01 PST
Expires: 22 Feb 2005 20:01 PST
Question ID: 462259
A company has $1000 par value bond outstanding that pays 11% annual
interest.  The current yeild to maturity on such bonds is the market
is 14%.

What is the price of the bonds for a maturity date of 30 years and 15 years.
Answer  
Subject: Re: Price of bonds
Answered By: elmarto-ga on 25 Jan 2005 06:34 PST
Rated:5 out of 5 stars
 
Hi again gofigure99!
As a11634-ga mentioned, the price of the bond with 15-year maturity is
$815.73 and the price of the bond with 30-year maturity is $789.92.
Here is the explanation.

Recall that the price of the bond is the present discounted value of
the flow of coupon payments plus the present value of the face value
of the bond at the maturity date. The discount rate we should use to
get the price of the bond is the yield to maturity.

Now, since the face value of the bond is $1000 and it pays 11% annual
interest, the coupon payment is $110 at the end of each year (11% of
$1000). So the formula we should solve for the 15-year bond is:

P15 = 110/(1.14) + 110/(1.14)^2 +  ... + 110/(1.14)^15 + 1000/(1.14)^15

The formula we should solve for the 30-yr bond is thus very similar:

P30 = 110/(1.14) + 110/(1.14)^2 +  ... + 110/(1.14)^30 + 1000/(1.14)^30

You can either take the time to calculate the values of P15 or P30
manually, or you can just use an online bond calculator. You can find
one at

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

Just plug in the values of your problem into this calculator [remember
that "Redemption Value" should be the same as face value, $1000.
Settlement date is any date and Maturity date is Settlement date plus
15 or 30 years]. You'll get:

P15 = $815.73
P30 = $789.92


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

Comments  
Subject: Re: Price of bonds
From: a11634-ga on 24 Jan 2005 01:58 PST
 
price of bond for maturity date of 15 and 30 years are $815.73 and
$789.92 respectively. Assume that pmt 1 a year
Subject: Re: Price of bonds
From: gofigure99-ga on 24 Jan 2005 10:52 PST
 
How did you obtain that result?

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