Time Value of Money 1) Assume that Ford has a 30 year, 6.5% coupon bond. Given F

Question

Time Value of Money 1) Assume that Ford has a 30 year, 6.5% coupon bond. Given Ford?s recent troubles, your broker indicates that the yield-to-maturity of this bond should be 7.95%. Assume that coupon payments are annual. What should be the price of this bond? 2) Assume that 3M Corporation has a 15 year, 8% coupon bond and that its reported yield-to-maturity is 7.3%. Assume that coupon payments are semiannual (remember that if payments occur on a semiannual basis then the reported yield to maturity will actually be twice the semiannual yield). What is the price of this bond?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A

Nper = 30 (indicates the period)

PV = ? (indicates the price)

FV = 1000 (indicates the face value)

Rate = 7.95% (indicates YTM)

PMT = 1000*6.50 = 65 (indicates the amount of interest payment)

Bond Price = PV(Rate,Nper,PMT,FV) = PV(7.95%,30,65,1000) = $835.99 or $836

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Part B:

Nper = 15*2 = 30 (indicates the period)

PV = ? (indicates the price)

FV = 1000 (indicates the face value)

Rate = 7.30%/2 (indicates semi-annual YTM)

PMT = 1000*8%*1/2 = 40 (indicates the amount of interest payment)

Bond Price = PV(Rate,Nper,PMT,FV) = PV(7.30%/2,30,40,1000) = $1063.18

Thanks.

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