Question

A company has just raised $6 million by issuing 4000 12-year 11% bond at par. It's predicted that the market yield of this type bonds would be 2.2 per cent lower than coupon rate after 3 years. What will be the expected price of this bond after 3 years?

Need the step by step process to get the answer

Step 1

Current characterisitics of the bond:

Time to maturity = 12-years

Coupon = 11% bond

Priced at par

Step 2

3 years down the line, expected characterisitics of the bond:

Time to matuirty = 12 - 3 = 9 years

Coupon = 11%

Market yield of this type bonds would be 2.2 per cent lower than coupon rate after 3 years.

Hence, Yield to maturity, YTM = Coupon rate - 2.2% = 11% - 2.2% = 8.80%

Step 3

Frequency of the coupon payment is not stated in the question. It's customary to assume semi annual coupon payments. I am ther...

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