Question

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company has a bond outstanding with a par value of €1,000, 25 years to maturity, and a coupon rate of 6.7 percent paid annually. If the yield to maturity is 7.8 percent, what is the current price of the bond?

Answer 1

Answer:

The current price of the bond is €883.25.

Explanation:

The par value of bond is €1,000.

The years to maturity are 25 years.

The coupon rate is 6.7%.

The yield to maturity is 7.8%.

Coupon value

= $Coupon\ rate\ \times\ Face\ value$

= $6.7%\ \times\ 1,000$

= €67

Bond price

= $Coupon\ \times\ \frac{1-\frac{1}{(1+YTM)^n} }{YTM}+\frac{Face\ value}{(1+YTM)^n}$

= $\ 67\ \times\ \frac{1-\frac{1}{(1+0.078)^2^5} }{0.078}+\frac{1,000}{(1+0.078)^2^5}$

= $(67\ \times\ 10.9)\ +\ 152.92$

= 730.3 + 152.952

= 883.252 or 883.25