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    Bond Price & Yield to Maturity

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    The Henry Company's $1,000 par value bond has 13 years remaining until it matures. Interest is paid quarterly, the yield to maturity is 7%, and the coupon rate is 12%.

    a) What's the price of this bond?
    b) If the yield to maturity on all bonds in the economy increased to 14%, would The Henry Company's bond increase or decrease more than The Paul Company's bond that has all the same features as The Henry Company's bond except that The Paul Company's bond has a maturity of 3 years? Why?

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    Solution Preview

    a) What's the price of this bond?

    For the bond, FV = 1000
    quarterly coupon payment = 1000*12%/4 = 30
    number of quarters = 13*4 = 52
    discount rate I/Y = 7%/4 = 1.75%
    Then by a financial calculator, or EXCEL "=-PV(1.75%,52,30,1000)", we can compute the
    present value of the bond is PV = 1,424.50, which is its price.

    b) If the yield to maturity on all bonds in the ...

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