You are considering investing in a 20-year bond that has a coupon rate of 7% and...
You are considering investing in a 20-year bond that has a coupon rate of 7% and a yield to maturity of 6.75%. The bond pays coupons annually. What is the fair price of the bond?
Homework Answers
Annual coupon=$1000*7%=$70
Hence price of bond=Annual coupon*Present value of annuity factor(6.75%,20)+$1000*Present value of discounting factor(6.75%,20)
=$70*10.80302147+$1000*0.27079605
=$1027.01(Approx).
NOTE:
1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$70[1-(1.0675)^-20]/0.0675
=$70*10.80302147
2.Present value of discounting factor=1000/1.0675^20
=$1000*0.27079605
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