The whitesell athletic corporations bonds have a face value...

The Whitesell Athletic Corporation's bonds have a face value of $1,000 and a 10% coupon paid semi-annually. The bonds mature in 10 years. If the yield to maturity (YTM) is 7%, what will the bond sell for?

Transcript

00:01 In the given question, we have to find out the selling price of the bond or the market price of the bond.

00:06 And they say that the face value of the bond is $1 ,000.

00:09 Open rate is 10 % and it is being paid semi -annually.

00:13 Maturity of the bond is for 10 years and ill -to maturity is 7 years.

00:18 Okay.

00:19 So the selling price of the bond will be present value of cash flow plus the present value of face value of bond now that annual cash flow or we can say the semi -annual cash flow is of it is said that the price of the bond is $1 ,000 and interest is being paid semi -annually and the coupon rate is of 5 % so semi -annually that means 10 % upon 2 so this gives us $50 so $50 so $50 will be received each six month so in a year you we are going to receive the coupon two times that is $50 after every six months so this is the cash flow that we have and the phase value of the bond that is fb is given to be $1 ,000 now for calculating the present value we need to have the pv factor and in this case the pv factor will be calculated upon the ytn that is ill to maturity okay and it is given to be 7 % so semi annually it will be divided by 2 that gives us 0 .035 this is the ill to maturity percent or we can say the pv factor therefore the selling price of the bond includes the present value of cash flow so the cash flow is being received cash flow is of $50 after every six months.

02:42 So this is a type of annuity.

02:45 So what we need to do, we need to find the present value of annuity and that will be the present value of cash flow.

02:57 And it is a type of annuity...

Question

The Whitesell Athletic Corporation's bonds have a face value of $1,000 and a 10% coupon paid semi-annually. The bonds mature in 10 years. If the yield to maturity (YTM) is 7%, what will the bond sell for?

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