Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period. Face value for bonds is $1000.
1. Hawk Inc. originally issued 10-year bonds with a face value of $1000 at par. The bonds have a coupon rate of 8%, and coupons are paid semiannually. The bonds will mature in 6 years, and the yield to maturity is 6.4% with semiannual compounding. Find the bond’s price today. If the yield rises, what do you expect will happen to the bond price?
price of coupon = Coupon payment per period * [1-(1+i)^-n]/i + par value/(1+i)^n
i = interest rate per period
n = number of periods
=>
price = 80/2 * [1-(1+0.064/2)^-12]/(0.064/2) + 1000/(1+0.064/2)^12
= 1078.69
If yield increases, bond price decreases
Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period....
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