Guest: Nick Turner is considering the purchase of a bond that was issued 4 years ago and has 18 years left till maturity. The bond has a coupon rate of 9.75 percent and a face value of $1,000. If the yield to maturity is 6.00%, calculate to the nearest penny the value of the bond today
I have to make a lot of assumptions before I can answer this question.
1) I have to assume that the redemption value is the same as the face value.
2) Usually coupons are paid 6 monthly and the coupon rate would be per 6 months but your rate is probably too high for this assumption, so I will assume that it is 9.75% p.a. paid yearly.
3) Yield = 6% (I will also assume that this is per annum)
Now, when I taught this topic, my students were given a formula page that they could refer to. (They had to know what all the letter meant)
This is a page from my notes: There are two commonly used forumulas. Do you know what the letters mean?
131228 Bond purchase price for a given yield.JPG
where
131228 - angle n at i.JPG
and
P is the 'today' value
C is the redemption value (I think of it as the 'cash in' value)
F is the face value
i is the yield (rate)
r is the coupon rate
n is the number of coupon periods left until maturity
I think that should be enough to get you started.
Tell me the value of each or the letters (pronumerals)
Tell me what answer you get.
If you have more problems let me know and try to tell me what the problem is.
Happy calculations.
Melody.
+118654 
