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4 January, 18:53

Microhard has issued a bond with the following characteristics:Par: $1,000Time to maturity: 15 years Coupon rate: 7 percent Semiannual paymentsCalculate the price of this bond if the YTM is:

a. 7 percent

b. 9 percent

c. 5 percent

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Answers (1)
  1. 4 January, 19:39
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    a.) $1000

    b.) $837.11

    c.) $1,209.30

    Explanation:

    This type of bond is a coupon paying bond. Using a financial calculator, input the following for each value of YTM;

    a.)

    Face Value; FV = 1,000

    Time to maturity of the bond; N = 15*2 = 30

    Recurring coupon payment = coupon rate * Face value = (7%/2) * 1000 = $35

    So, coupon payment PMT = $35

    Semiannual interest rate; I/Y = 7%/2 = 3.5%

    then compute the price of the bond; CPT PV = $1000

    This bond is selling at par since the YTM = Coupon rate

    b.)

    The YTM in this case is higher than the coupon rate hence expect the price of the bond to be lower than the face value;

    Face Value; FV = 1,000

    Semiannual interest rate; I/Y = 9%/2 = 4.5%

    Time to maturity of the bond; N = 30

    Recurring coupon payment = coupon rate * Face value = (7%/2) * 1000 = $35

    So, coupon payment PMT = $35

    next, compute the price of the bond; CPT PV = $837.11

    This bond is selling at a Discount.

    c.)

    The YTM of 5% lower than the coupon rate hence expect the price of the bond to be higher than the face value;

    Face Value; FV = 1,000

    Semiannual interest rate; I/Y = 5%/2 = 2.5%

    Time to maturity of the bond; N = 30

    Recurring coupon payment = coupon rate * Face value = (7%/2) * 1000 = $35

    So, coupon payment PMT = $35

    next, compute the price of the bond; CPT PV = $1,209.30

    This bond is selling at a Premium.
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