Consider a 8-year, $1,000 par, 4% bond that pays semi-annual coupons. What is the price of...
Consider a 8-year, $1,000 par, 4% bond that pays semi-annual coupons.
What is the price of this bond if interest rate is 5%?
Homework Answers
The Price of the Bond
· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
· Here, the calculation of the Bond Price using financial calculator is as follows
|
Variables |
Financial Calculator Keys |
Figures |
|
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
|
Coupon Amount [$1,000 x 4.00% x ½] |
PMT |
20 |
|
Market Interest Rate or Yield to maturity on the Bond [5.00% x ½] |
1/Y |
2.50 |
|
Maturity Period/Time to Maturity [8 Years x 2] |
N |
16 |
|
Bond Price/Current market price of the Bond |
PV |
? |
Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $934.72.
“Hence, the Price of the Bond will be $934.72”
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