Question

Suppose that a 25-year government bond has a maturity value of $1000 and a coupon rate of 7%, with coupons paid semiannually. Find the market price of the bond if the yield rate is 6% compounded semiannually. (Round your answer to the nearest cent.)

Answer 1

Answer: $1,128.65

Explanation:

Formula for Bond price;

$= Coupon payment * \frac{1 - ( 1 + yield)^{-period} }{yield} + \frac{Face value}{(1 + r)^{period} }$

Period = 25 * 2 = 50 semi annual periods

Yield = 6%/2= 3%

Coupon = 7%/ 2 = 3.5%

Coupon payment = 3.5% * 1,000 = $35

$= 35 * \frac{1 - ( 1 + 0.03)^{-50} }{0.03} + \frac{1,000}{(1 + 0.03)^{50} }\\\\= 35 * 25.729764 + 228.10707978975\\\\= 1,128.6488$

= $1,128.65