Question

Consider a bond (with par value = $1,000) paying a coupon rate of 8% per year semiannually when the market interest rate is only 6% per half-year. The bond has three years until maturity. a. Find the bond's price today and six months from now after the next coupon is paid. (Round your answers to 2 decimal places.)

Answer 1

Answer:

a. Find the bond's price today  Price = 901,65

and six months from now after the next coupon is paid. Price = $915,75

Explanation:

Face Value = $1,000

Annual Coupon Rate = 8%

Semi-annual Coupon Rate = 4%

Semi-annual Coupon = 4%*$1,000 = $40

Semi-annual YTM = 6%

Today:

Time to Maturity = 3 years

Price = $40*PVIFA(6%, 6) + $1,000*PVIF(4%, 6)

Price = $40*(1-(1/1.06)^6)/0.06 + 1,000/1.06^6

Price = 901,65

Six months from now:

Time to Maturity = 2.5 years

Price = $40*PVIFA(6%, 5) + $1,000*PVIF(6%, 5)

Price = $40*(1-(1/1.06)^5)/0.06 + 1,000/1.06^5

Price = $915,75