Question

Wesimann Co. issued 12-year bonds a year ago at a coupon rate of 7.8 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 6.1 percent, what is the current bond price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Price of bond  =1,143.18

Explanation:

The value of the bond is the present value(PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

Value of Bond = PV of interest + PV of RV

The value of bond for Wesimann Co can be worked out as follows:

Step 1  

PV of interest payments

Semi annul interest payment  

= 7.8% × 1000 × 1/2 = 39

Semi-annual yield = 6.1%/2 = 3.05  % per six months

Total period to maturity (in months)

= (2 × 12) = 24 periods (Note it was sold 12  years ago)

PV of interest =  

39  × (1- (1+0.0305)^(-24)/) 0.0305 = 656.94

Step 2  

PV of Redemption Value

= 1,000 × (1.0305)^(-24) = 486.237

Price of bond

=   656.94 +486.23 = 1,143.179

Price of bond  =1,143.18