Question

A 5% coupon, 18-year annual bond has a yield to maturity of 6.2%. Assuming the par value is $1,000 and the YTM does not change over the next year, what will the price of the bond be today

Answer 1

Price of Bond=$871.997

Step-by-step explanation:

The price of a bond is the present value (PV) of the future cash inflows expected from the bond discounted using the yield to maturity.

Price of Bond = PV of interest payment + PV of redemption value

PV of interest payment

interest payment = 5%× 1,000 = $50

PV = A × (1- 1+r)^(-n)/r

r- 6.2%, n- 18, A- 50

PV = 50 × (1 -1.062^(-18))/0.062=533.341

PV of redemption

PV = FV × (1+r)^(-n)

PV = 1,000 × 1.062^(-18)= 338.655

Price of the stock = 533.3419 + 338.655

Price of Bond=$871.997