FINANCE Bonds instructions I help Question 2 of 10 Save Exi

FINANCE Bonds instructions I help Question 2 (of 10) Save & Exit Submit value 10.00 points Even though most corporate bonds in the United States make coupon payments semiannually. bonds issued elsewhere often have annual coupon payments Suppose a German company issues a bond with a par value of 1,000, 10 years to maturity, and a coupon rate of 7 2 percent paid annually If the yield to maturity is 8.3 percent, what is the current price of the bond? Note. When coupons are paid annually, the YTM will be quoted with annual compounding. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) Price References eBook & Resources Worksheet Leaming Objective 07.02 Bon valoe and yields and why they nuctuate Difficulty:

Solution

ANSWER = 1 Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is   = €                   1,000 Annual Coupon % 7.20% Annual Coupon Amount €                         72 Step 2: Calculate number of years to Maturity Number of years to maturity = 10 years Step 3 : Yield to Maturity = 8.3%, So discount rate = 8.3% PVF = 1 / Discount rate = 1/ 1.083 Result of above will again divide by 1.083 , repeat this till last period Option 1= Life of the bond is 10 years CALCULATION OF CURRENT MARKET PRICE OF THE BOND OR PURCHASE PRICE Years Interest Amount PVF @ 8.3% PresentValue 1 Interest €                    72.00                     0.9234 €               66.48 2 Interest €                    72.00                     0.8526 €               61.39 3 Interest €                    72.00                     0.7873 €               56.68 4 Interest €                    72.00                     0.7269 €               52.34 5 Interest €                    72.00                     0.6712 €               48.33 6 Interest €                    72.00                     0.6198 €               44.62 7 Interest €                    72.00                     0.5723 €               41.20 8 Interest €                    72.00                     0.5284 €               38.05 9 Interest €                    72.00                     0.4879 €               35.13 10 Interest €                    72.00                     0.4505 €               32.44 10 Bond Value €              1,000.00                     0.4505 €             450.52 Total €             927.18 Current price of the Bond = €                927.18