Suppose that general motors acceptance corporation issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 7% (annual payments). the yield to maturity on this bond when it was issued was 6%. assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?

Ans. The price of the bond immediately after it makes its first coupon payment is $1,068.02

Explanation:

Hi, we have to bring to present value the remaining cash flows, that is 9 coupons and its face value, so we need to use the following equation.

Where:

Coupon = 0.07*$1,000=$70

YTM = Yield to maturity, in our case 6% or 0.06

n = 9 (since the bond is paying every year and there are 9 years left until maturity)

Face Value= $1,000.

Everything should look like this

Therefore:

So, the price of this bond right after paying its first coupon is $1,068.02

Best of luck.

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