What is the price of an annual coupon bond with 10 years to maturity, 8% coupon rate, if yield to maturity is 9%?
I can’t seem to work it out right.
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I am not familiar with the formula you used. The value of the bond is the present value of all its coupons plus the present value of its payments. So, if we assume that the bond is going to pay off for 100 then the present value of that payment is:
100 / (1.09^10)
The present value of the ith interest payment is:
So to find the value of the bond, I add up the present value of the 10 interest payments and the final payment. I find the current value of the bond to be 93.5823.
In doing these calculations, I am assuming the bond pays interest only once a year. In the real world, most bonds pay twice a year and some bonds pay four times a year.