Accounting and Finance potential exam question

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#1
'What is the price of a bond with an annual coupon rate of 6%, the nominal value is £100.The yield to maturity is 8% per year and the bond has 3 years to mature?' A question like this may come up in an exam so I would just like to know how I would solve this?
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4 years ago
#2
(Original post by AsianInvasion98)
'What is the price of a bond with an annual coupon rate of 6%, the nominal value is £100.The yield to maturity is 8% per year and the bond has 3 years to mature?' A question like this may come up in an exam so I would just like to know how I would solve this?
So you know that the discount rate is 8% for an NPV of zero, and that the cash flow is £6 per year plus 100% in year three.

So you can work out your discount factor of 1/1.08

You can then work out the discounted cash flow and sum it up to find the NPV of the cash flows. The price is what you would have to pay for the NPV of the investment to equal zero and therefore its price is equal to the NPV of all the future cash flows.

There's a handy tutorial on Investopedia: http://www.investopedia.com/universi...ancedbond2.asp

I've also attached a simple bond pricing model I wrote for you that you can have a play with and try to understand.
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