Question

1. A bond has face value 500 and coupon rate 4%. Coupons are paid every 6 months, and the redemption amount is the face value. Find the price if the yield rate and time to maturity are a. 5% and 2 years b. 3% and 2 years c. 5% and 15 years d. 3% and 15 years Note the coupon and yield rates are nominal annual interest rates compounded twice a year.

please answer all questions

Answer 1

Bond price is computed using Excel PV function, as follows.

Annual coupon = 500 x 4% x (1/2) = 10

(a) Semi-annual yield = 5%/2 = 2.5% and Number of coupon payments (Time to maturity) = 2 x 2 = 4

Case (a)
Annual Coupon (PMT) ($) =	-10
Face value (FV) ($) =	-500
Semi-annual yield (RATE) =	2.50%
Number of Periods (NPER) =	4
Bond Price (PV) ($) =	490.60

(b) Semi-annual yield = 3%/2 = 1.5% and Number of coupon payments (Time to maturity) = 2 x 2 = 4

Case (b)
Annual Coupon (PMT) ($) =	-10
Face value (FV) ($) =	-500
Semi-annual yield (RATE) =	1.50%
Number of Periods (NPER) =	4
Bond Price (PV) ($) =	509.64

(c) Semi-annual yield = 5%/2 = 2.5% and Number of coupon payments (Time to maturity) = 2 x 15 = 30

Case (c)
Annual Coupon (PMT) ($) =	-10
Face value (FV) ($) =	-500
Semi-annual yield (RATE) =	2.50%
Number of Periods (NPER) =	30
Bond Price (PV) ($) =	447.67

(d) Semi-annual yield = 3%/2 = 1.5% and Number of coupon payments (Time to maturity) = 2 x 15 = 30

Case (d)
Annual Coupon (PMT) ($) =	-10
Face value (FV) ($) =	-500
Semi-annual yield (RATE) =	1.50%
Number of Periods (NPER) =	30
Bond Price (PV) ($) =	560.04