Question

Vandelay Industries has two bonds outstanding. Bond A was issued as a 30 year bond, 20 years ago, at a coupon rate of 7%. Bond B was issued as a 30 year bond, 15 years ago, at a coupon rate of 7%. The current market rate applicable to both bonds is 9% and both bonds pay coupon payments semi-annually. What are the prices of the two bonds today?

please show work

Answer 1

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 of A

= 70/2 * [1-(1+9%/2)^-20]/(9%/2) + 1000/(1+9%/2)^20

= 869.92

price of B

= 70/2 * [1-(1+9%/2)^-30]/(9%/2) + 1000/(1+9%/2)^30

= 837.11