Question

Due to numerous lawsuits, major chemical manufacturer has recently experienced a market reevaluation. The firm has 15-year, 8% coupon bond, paid semiannually and par value of $1,000. The required nominal rate (yield) on this debt has now risen to 10%. What is the current price of this bond?

Answer 1

Bond Price = 846.2754897 rounded off to $846.28

Step-by-step explanation:

To calculate the price of the bond, we need to first calculate the coupon payment per period. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,

Coupon Payment (C) = 0.08 * 1/2 * 1000 = $40

Total periods (n)= 15 * 2 = 30

r or YTM = 10% * 1/2 = 5% or 0.05

The formula to calculate the price of the bonds today is attached.

Bond Price = 40 * [( 1 - (1+0.05)^-30) / 0.05] + 1000 / (1+0.05)^30

Bond Price = 846.2754897 rounded off to $846.28