Category: Business and Money > Finance
Asked by: fatima1102-ga
List Price: $2.00
11 Sep 2005 16:49 PDT
Expires: 11 Oct 2005 16:49 PDT
Question ID: 566916
A five-year $1,000 par value bond pays a 6.50% annual coupon. Given a YTM of 8.0%, what is the price of the bond today?
Answered By: omnivorous-ga on 12 Sep 2005 08:58 PDT
Fatima1102 ? The yield-to-maturity is the real yield of all cash payments and allows us to calculate the net-present value (NPV) of a cash flow. That NPV is the bond price: c/(1 + r) + c/(1 + r)^2 + . . . + c/(1 + r)^n + B/(1 + r)^n = P Where: r = yield-to-maturity or true return (in decimals) c = annual coupon payment (in dollars) n = number of years to maturity B = par value P = purchase price You have: $6.50 / (1.08) + $6.50 / (1.1664) + $6.50 / (1.2597) + $6.50 / (1.3605) + $6.50 / (1.4693) + $1,000 / (1.4693) = $706.54 Moneychimp.com ?Bond yield-to-maturity? (undated) http://www.moneychimp.com/articles/finworks/fmbondytm.htm Google search strategy: ?yield-to-maturity? bonds Best regards, Omnivorous-GA
rated this answer:
From: myoarin-ga on 11 Sep 2005 19:27 PDT
Fatima, I could tell you in a snap, but I have to ask if you are learning anything from paying for answers to all these homework questions? If you are a Muslim, as your user name suggests, of course, interest on debt is foreign to you, but the relevant mathematics can still be learned. Myoarin
From: celtic_rice-ga on 12 Sep 2005 15:58 PDT
Omnivorous-ga made a slight error: the coupon should be $65 each year not $6.50. Therefore, the price is $940.109.
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