A General Power bond with a face value of $1,000 carries a coupon rate of 9.6%,

Question

A General Power bond with a face value of $1,000 carries a coupon rate of 9.6%, has 9 years until maturity, and sells at a yield to maturity of 8.6%. (Assume annual interest payments.)

At what price does the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

What will happen to the bond price if the yield to maturity falls to 7.6%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A General Power bond with a face value of $1,000 carries a coupon rate of 9.6%, has 9 years until maturity, and sells at a yield to maturity of 8.6%. (Assume annual interest payments.)

Explanation / Answer

Interest payment that bondholders receive each year

Face Value of bond = $1000

Years until maturity = 9

Coupon rate = 9.6%

Yield to maturity = 8.6%

CxFX1-(1+r)^-t/r

9.6%x1000x1-(1+8.6%)^-9/8.6%

0.096x1000x1-(1+0.086)^-9/0.086

=585.02

b) Price of the bond = Present value of interest payment +Present value of face value of bond

585.02 + 1000/(1+0.086)^9

=585.02+475.92 = $1060.94

C)Bond Price if yield to maturity falls to 7.6

Present value of Interest payment = CxFX1-(1+r)^-t/r

= 0.096 x 1000x 1-(1+0.076)^-9/0.076 = 609.81

Present value of face value of bond = FC/(1+r)^t = 1000/(1+0.076)^9 = 517.24

Bond price = 609.81+517.24 = 1127.05

thus if yield to maturity falls to 7.6% , bond price will behigher.

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