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Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company's bonds be priced at today

Answer :

thaovtp1407

Answer:

Price of a bond =  $1065.792

Explanation:

Given:

  • Coupon rate: 8.25% => Coupon payment: 1000*8.25% =82.5 (C)
  • YTM = 6.875%
  • n =  six-year

Price of a bond = PV of Interest payment + PV of RV

  • PV of Interest payment : C(1- (1+r)^(-n)/r

<=> 82.5× (1-(1.06875)^(-6))/0.06875 =  394.76

  • PV of RV ( Redemption value)

<=> PV of RV =  RV × [tex](1+r)^{-n}[/tex]

<=> PV of RV = 1000 × [tex](1+0.06875)^{-6}[/tex] = 671.032

So we have:

Price of a bond = 394.76  +  671.032  = $1065.792

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