What is the price of a coupon bond that has annual coupon payments of $85, a par value of $1,000, a yield to maturity of 10%, and a maturity of three years?

Question

Brayan Madden

Business

27 February, 02:12

What is the price of a coupon bond that has annual coupon payments of $85, a par value of $1,000, a yield to maturity of 10%, and a maturity of three years?

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Answers (1)

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Levi Dodson · Answer 1

Let p be the price of the bond.

Annual coupons payment = 85

Par value (future value) is $1000.

So with a yield-to-maturity of 10% in three years,

p (1+10%) = 1000+3*85

solve for p

p = (1000+3*85) / 1.10=1140.91

Note: since the coupon payment is not reinvested in the bond, the value is not compounded. Thus there is additional benefit if the payments are reinvested elsewhere. In other words, the yield-to-maturity actually under-estimates the potential yield.