Question

Missing information on a bond. Your broker faxed to you the following information about two monthly coupon bonds that you are considering as a potential investment. Unfortunately, your fax machine is blurring some of the items, and all you can read from the fax on the two different bonds is the following: IBM Coupon Bond $5,000 AOL Coupon Bond $5,000 ? Features Face value (Par) Coupon rate Yield to maturity Years to maturity Price 5.5% 8.5% 25 7.5% 15 $3,876.32 ? Fill in the missing data from the information that the broker sent.

Answer 1

Calculations of Coupon rate and Price of the bond :

Price of the bond (P) = {Face value (F)× Coupon rate (CR)} / Yeild to maturity (YTM)

IBM coupon bond :

Price = ($ 5,000 × 5.5%) / 8.5%

Price = $ 275 / 8.5%

Price = $ 3,235.29

AOL coupon bond :

Price = (F × CR)/YTM

$ 3,876.32 = (5,000 × CR) / 7.5%

$ 3,876.32 × 7.5% = 5,000 × CR

290.724 = 5,000 × CR

CR = 290.725/5,000

Coupon rate = 5.81% (approximately)