Selling bonds before full maturity but after some coupons have been paid out
I'm currently working on the following practice problem and I'm not really sure where I'm going wrong...
"Some time ago you bought a bond issued by Mazota cars. The bond when issued had 10 years to maturity, a face value of 00 and a semi-annual coupon . You have just received the 6th coupon from this bond and decide to sell it. The yield to maturity is currently 12% how much will you get for the bond?"
I know that the yield per period is 6% and that there are 14 periods left (20 to start with, 6 already paid out). So I would think the answer would be
[50/0.12]*(1-1/(1.06^14)) + 1000/(1.06^14) = 4.68
However, this answer is about 2 off from the correct answer of 7.05. What am I doing wrong?
(1)1 Comments
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You can get the "correct" answer by using 6% as the interest rate everywhere in the Present Value of an Annuity formula that you quote..
Something that the questioner got "wrong": they didn't fully specify the target yield rate; they should have said "12% compounded semi-annually" since that assumption produces their "correct" answer...
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