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8 August, 18:07

The ExecUfind Corporation has issued 20minusyear semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the firm's current price per bond?

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  1. 8 August, 20:49
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    Current price per bond is $849.54

    Explanation:

    Coupon payment = 1000 x 10% = $100 annually = $50 semiannually

    Number of periods = n = 20 years x 2 = 40 periods

    Yield to maturity = 12% annually = 6% semiannually

    Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula

    Price of the Bond = C x [ (1 - (1 + r) ^-n) / r ] + [ F / (1 + r) ^n ]

    Price of the Bond = $50 x [ (1 - (1 + 6%) ^-40) / 6% ] + [ $1,000 / (1 + 6%) ^40 ]

    Price of the Bond = $50 x [ (1 - (1.06) ^-40) / 0.06 ] + [ $1,000 / (1.06) ^40 ]

    Price of the Bond = $752.31 + $97.22

    Price of the Bond = $849.54
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