The Yale Company has one bond outstanding. The bond has a $20,000 face value and matures in 20 years. The bond makes no interest payments for the first 6 years, then pay $1,100 every six months over the next 8 years and finally pays $1,400 every six months over the last 6 years. The annual YTM is 5.6%. What is the price of this bond today

$16,695.11

Explanation:

the price of the bond is equal to the present value of its cash flows:

value of cash flows in year 6 = $1,100 x 12.75523 (PV annuity factor, 16 periods, 2.8%) = $14,030.75

value of cash flows in year 14 = $1,400 x 10.07390 (PV annuity factor, 12 periods, 2.8%) = $14,103.46

present value in year 0 = [$14,030.75 / 1.056⁶] + [$14,103.46 / 1.056¹⁴] = $10,118.06 + $6,577.05 = $16,695.11

u = 30

continuing your method

= +

subtract from both sides

= - thus

= -

= ⇒ u = 30