Question

3. You are considering buying a 20-year bond that was issued 2 years ago. Its coupon rate is 4% and interest rates are made semiannually. Its face value is $1000. If the current market interest rate is 6.09%, what should be the bond's price?

Answer 1

Coupon rate = 4% (Coupon paid semiannually)

Face value = $ 1,000

Interest rate = 6.09%

Bond was issued 2 years ago thus remaining tenure = 18 yr

Coupon = 4% of $ 1,000 = $ 40

Semiannual coupon payment = $ 20

P=C(P/A, i%, n) +M(P/F,1%,n)

The formula will change as the payment is made semi-annually

PES (P/A, 5, 2n) + M(P/F,4%, 2n)

— P = 4(P/A, 6,99%,2x18) +1, 000(P/F, 6.0%, 218)

P = 20 x 1 - 1.03045-36 - 0.03045 + 1.000 1.0304536

S P = 20 x 21.6863 +1.000 x 0.339649

S P = 433.7278 + 339.6493

P~$ 773.38

Bonds price = $ 773.38

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