Question

Harrison Co. issued 16-year bonds one year ago at a coupon rate of 7.7 percent. The bonds make semiannual payments. If the YTM on these bonds is 5.4 percent, what is the current dollar price assuming a $1,000 par value

Answer 1

Bond Price = $1234.403 rounded off to $1234.40

Step-by-step explanation:

To calculate the price of the bond today, we will use the formula for the price of the bond. 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) = 1,000 * 0.077 * 6/12 = $38.5

Total periods remaining (n) = [16 - 1] * 2 = 30

The bonds were issued one year ago for 16 years. Thus, remaining years are 15 and semi annual periods are 30

r or YTM = 0.054 * 6/12 = 0.027 or 2.7%

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

Bond Price = 38.5 * [( 1 - (1+0.027)^-30) / 0.027] + 1000 / (1+0.027)^30

Bond Price = $1234.403 rounded off to $1234.40