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Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 15 years to maturity, and a coupon rate of 7.3 percent paid annually. If the yield to maturity is 7.5 percent, what is the current price of the bond?

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hyderali230

Answer:

The current price of the bond is €982.35

Explanation:

According to given data

Coupon payment = €1000 x 7.3% = €73

Number of years = n = 15 years

Yield to maturity = 7.5%

Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula:

Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]

Price of the Bond =€73 x [ ( 1 - ( 1 + 7.5% )^-15 ) / 7.5% ] + [ €1,000 / ( 1 + 7.5% )^15 ]

Price of the Bond = € x [ ( 1 - ( 1.075 )^-15 ) / 0.075 ] + [ €1,000 / ( 1.075 )^15 ]

Price of the Bond = €644.38 + €337.97

Price of the Bond = €982.35

Answer:

The current price of the is   Euros 982.35

Explanation:

The current market is computed using by discounting the future cash flows of the bond to present values.The discounting factor used is 1/(1+r)^N where r is the yield to maturity of 7.5% and N year of relevant cash flow.

Kindly find attached spreadsheet for detailed computations

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