Bond Pricing

An bond has 10 years until maturity, a coupon rate of 8 percent, and
sells for $1,100.

a. What is the current yield on the bond?

b. What is the yield to maturity?

Bond Yield

11.  A bond carries a coupon rate of 8 percent, has 9 years until
maturity, and sells at a yield to maturity of 7 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 6 percent?

Question 1:

a. Assuming a Face Value of $1000:
   
   Annual Coupon Interest= 1000 x 8%
                         = $80
   
  
   Using the Current Yield equation:
   
   Current Yield = Annual Coupon Interest/Current Market Price
                 = 80/1100
                 = 7.27%

b. Using Microsoft Excel or a financial calculor:
   
   Yeild to Maturity (YTM)= 6.67%

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Question 2:

a. Assuming a Face Value of $1000:

   Annual Coupon Interest= 1000 x 8%
                         = $80
   
   The bondholders will recieve an annual interest payment of $80.


b. Using the Valuation Formula for Bonds:
   
   Bo= [CP/YTM . [1 - 1/(1+YTM)^n] + FV/(1+YTM)^n
where: 
   Bo : is the intrinsic value of the bond, its price at time zero
   CP : is the Coupon Payment or the Annual Coupon Interest
   YTM: is the Yield to Maturity
   ^  : means superscript or to the power of. ( n in this case )
   FV : is the Face Value of the bond.

   Bo= [80/7% . [1 - 1/(1+7%)^9] + 1000/(1+7%)^9
     = 521.22 + 543.93
     = $1065.15
  
   Therefore, the selling price of the bond is $1065.15

c. Theoritically, as the YTM decreases from 7% to 6%, the price of the
bond will
   increase. To quantify this, I'll solve for the Bo using the new YTM.

   Bo= [80/6% . [1 - 1/(1+6%)^9] + 1000/(1+6%)^9
     = 544.14 + 591.9
     = $1136.04
   
   The selling price increased by $70.89 (1136.04 - 1065.15), when the yield to    
   maturity fell to 6%.
           
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I hope this was of help to you. Please feel free to ask any further questions.

Regards,
Mohamed El-Kamony
6-8-2005

or for the easy way without learning anything a bond calculator.

http://www.calculator.com/calcs/bondcalc.html

great explination mohamed_elkamony