An 8.5% coupon, 25 year, $1000 face value bond presently has a yield to maturity of...
An 8.5% coupon, 25 year, $1000 face value bond presently has a yield to maturity of 9.75%. Assuming annual interest payments, what is the price of the bond?
Homework Answers
Annual coupon=1000*8.5%=85
Hence price of bond=Annual coupon*Present value of annuity factor(9.75%,25)+$1000*Present value of discounting factor(9.75%,25)
=85*9.25437694+$1000*0.097698248
=$884.32(Approx).
NOTE:
1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=85[1-(1.0975)^-25]/0.0975
=85*9.25437694
2.Present value of discounting factor=1000/1.0975^25
=1000*0.097698248
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