Question

Alex buys a ten-year 10,000 floating rate par value bond with annual coupons. She knows the coupons will be level at 6.5% for the first five years, and then increase by a factor of 1.04 every year.

a. Find the price for this bond if she wants a yield rate of at least 7%per annum for the ten-year period.

b. Find the amount of interest paid in the fifth coupon.

c. Find the amount of principal in the fourth coupon

Answer 1

a. The price for this bond = $9878.06

Year	Coupon Rate	Cash Flow	PVF @ 7%	Present Value
1	6.50	650.00	0.934579	607.48
2	6.50	650.00	0.873439	567.74
3	6.50	650.00	0.816298	530.59
4	6.50	650.00	0.762895	495.88
5	6.50	650.00	0.712986	463.44
6	6.76	676.00	0.666342	450.45
7	7.03	703.04	0.62275	437.82
8	7.31	731.16	0.582009	425.54
9	7.60	760.41	0.543934	413.61
10	7.91	10,790.82	0.508349	5,485.51
Price for this bond				$ 9,878.06

b. The amount of Interest paid in the fifth coupon = $650

c. The amount of principal in the fourth coupon = $0

Year	Beginning	Interest @ 7%	Principal	Payment	End
1	9,878	691	0	650	9,920
2	9,920	694	0	650	9,964
3	9,964	697	0	650	10,011
4	10,011	701	0	650	10,062
5	10,062	704	0	650	10,117
6	10,117	708	0	676	10,149
7	10,149	710	0	703	10,156
8	10,156	711	20	731	10,136
9	10,136	710	51	760	10,085
10	10,085	706	10,085	10,791	0