Question

Triumph Corp. issued five-year bonds that pay a coupon of 6.375 percent annually. The current market rate for similar bonds is 8.5 percent. How much will you be willing to pay for Triumph's bond today

Answer 1

Price of bond = $916.26

Step-by-step explanation:

The amount to be paid for the bond would be equal to the Present value (PV) of the redemption Value (RV) plus the present value of the interest payments discounted at the yield rate.

Let us assume that the face value of the bond is 1000 and it is redeemable at par

Interest payment = 6.375%× 1000 = 63.75

PV of interest payment = A× (1- (1+r)^(-n))/r

A- 63.75, r-8.5%, n-5

PV = 63.75 ×(1- (1.085)^(-5))/0.085)

PV = 251.215

PV of RV

PV = RV × (1+r)^(-5)

= 1,000 × (1.085)^(-5)

= 665.045

Price of bond = $916.26