Question

Nesmith Corporation's outstanding bonds have a $1,000 par value, a 12% semiannual coupon, 12 years to maturity, and an 8% YTM. What is the bond's price? Round your answer to the nearest cent.

Answer 1

The bond's price is $1,304.94

Step-by-step explanation:

Price of the bond is the present value of all cash flows of the bond. Price of the bond is calculated by following formula:

According to given data

Coupon payment = C = $1,000 x 12% = $120 annually

Coupon payment = C = $120 / 2 = $60 semiannually

Number of periods = n = 2 x 12 years = 24 periods

Current Yield = r = 8% / 2 = 4% semiannually

Price of the Bond = $60 x [ ( 1 - ( 1 + 4% )^-24 ) / 4% ] + [ $1,000 / ( 1 + 4% )^24 ]

Price of the Bond = $60 x [ ( 1 - ( 1 + 0.04)^-24 ) / 0.04 ] + [ $1,000 / ( 1 + 0.04 )^24 ]

Price of the Bond = $60 x [ ( 1 - ( 1.04)^-24 ) / 0.04 ] + [ $1,000 / ( 1.04 )^24 ]

Price of the Bond = $914.82 + $390.12 = $1,304.94