Fifteen years ago TravelEasy Inc.issued twenty-five-year 10% annual coupon bonds with a $1,000 face value each.Since then,interest rates in general have fallen and the yield to maturity on the firm's bonds is now 6%.Given this information,what is the price today for a TravelEasy bond?

Question

Quizplus · Accepted Answer

To calculate the price of the bond today, we need to discount the future coupon payments and the face value using the current yield to maturity of 6%. 
Here are the steps to calculate the price: 
1. Find the present value of each coupon payment: 
PV of each coupon payment = Coupon payment / (1 + YTM)^n 
where YTM is the yield to maturity and n is the number of years until the coupon payment is due. 
In this case, the coupon payment is $100 ($1,000 face value x 10% coupon rate), so: 
PV of each coupon payment = $100 / (1 + 0.06)^n

2. Find the present value of the face value: 
PV of face value = Face value / (1 + YTM)^n 
In this case, the face value is $1,000, so: 
PV of face value = $1,000 / (1 + 0.06)^25

3. Add up the present value of each coupon payment and the present value of the face value: 
Bond price = PV of coupon payments + PV of face value 
Bond price = $100 / (1 + 0.06)^1 + $100 / (1 + 0.06)^2 + ... + $100 / (1 + 0.06)^25 + $1,000 / (1 + 0.06)^25

Using a financial calculator or spreadsheet, we can calculate that the bond price is $1,294.40.

Fifteen Years Ago TravelEasy Inc