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Bond Valuation - Bond pricing

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A bond has a face value of $1000 and has 3 full years to maturity. It pays an annual coupon of 10% and is currently yielding 6% per annum to maturity. What is the price of the bond?

Also, suppose the credit perception of the company improves at the end of year one. At the very beginning of year two (ie 2 coupons remaining) what is the price of the bond if investors suddenly require a yield to maturity of 4% per annum for the remaining 2 years?

Please provide calculation and commentary to explain answers to the above (simple English please).

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Solution Summary

The solution computes the price of the bond with explanation for the same.

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Radhika Lakshmi, MPhil
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  • MPhil, Madurai Kamaraj University
  • MCom, Annamalai University
  • IATA, International Air Transport Association
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