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29 April, 16:35

You are considering investing in a GM bond with 7 years to maturity. The face value of the bond is $1,000. The coupon rate is 6% (annual payments). When the market requires a yield to maturity of 5% for this bond, what is the price of the GM bond

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  1. 29 April, 20:11
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    Price of bond is = $ 1057

    Explanation:

    As we know that;

    Price of bond = C * [1 - (1+r) ∧-n] / r + F / (1+r) ∧n

    where C = periodic coupon payment = 1000 * 6% = 60

    F = Face value of bond = 1000

    r = yield to maturity = 5% = 0.05

    n = number of periods till maturity = 7 years

    Putting values;

    = 60 * [ 1 - (1 + 0.05) ∧-7 ] / 0.05 + 1000 / (1+0.05) ∧7

    = 60 * (0.2893 / 0.05) + 710

    = 60 * 5.786 + 710

    = 347.16 + 710

    = 1057
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