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(Remember for 3 changes needed for semiannual bonds)

A $1,000 par value, 10 years corporate bond issued by ABC Company promises to pay a semiannual coupon of 8.5% and pay back the principle or par value on maturity date, July 15, 2025. Today, the discount rate on future payments (yield to maturity) is 5.473%. The price of the bond today will be:

Annual coupon payment = $1,000 x 0.085 = $ 85 YTM = 5.473%/2 = 0.02736

Present value of coupon stream = 𝑃𝑃𝑃𝑃𝑃𝑃 𝑃𝑃 1−1/(1+𝑟𝑟)𝑛𝑛 𝑟𝑟

Present value of coupon stream = (85/2) 𝑃𝑃 1−1/(1+0.02736)10𝑥𝑥2 0.02736 = $648.01

Present value of par value = $1,000 x 1(1+0.02736)10𝑥𝑥2 = $582.84

Bond price = $648.01 + $582.84 = $ 1,230.85

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