Lion Corp. has a $4,000 par value bond outstanding with a coupon rate of 4.6 percent paid semiannually and 20 years to maturity. The yield to maturity on this bond is 2.1 percent. What is the dollar price of the bond

Price of the bond = $5626.2518

Explanation:

The price of a bond is the present value (PV) of the future cash inflows expected from the bond discounted using the yield to maturity.

The price of the bond can be calculated as follows:

PV of interest payment + PV of redemption Value

Step 1

PV of interest payment

Interest payment = (4.6% * $4000) / 2

=$ 92

Semi annual yield = 2.1/2 = 1.05 %

PV of interest payment

= 92 * (1 - (1.0105) ^ (-20*2)) / 0.0105)

= 2992.30

Step 2

PV of redemption value

= 4,000 * (1+0.0105) ^ (-20*2)

= 2633.948

Step 3

Price of bond

= $12992.30 + $2633.94

=$5626.2518