Question

1. Ron is considering investing in a bond issued by the City of San Diego. The bond pays semiannual coupons, has a face value of $1,000, has a coupon rate of 8% and matures in 4 years. If the bond has an effective annual yield to maturity of 5.0625%, what fair price should Ron expect to pay for the bond?

Answer 1

Step-1:Calculation of nominal interest rate
Effective annual rate		=	((1+(i/n))^n)-1		Where,
0.050625		=	((1+(i/2))^2)-1		i	Nominal annual rate	=	?
1.050625		=	(1+(i/2))^2		n	Number of time compounds in a year	=	2
1.050625	^ (1/2)	=	1+(i/2)
1.025000		=	1+(i/2)
0.025000		=	i/2
0.050000		=	i
So, nominal annual interest rate		=	5.00%
Step-2:Calculation of fair price of bond
Fair price of bond is the present value of cash flow from bond which is calculated as follows:
Price of bond	=	=-pv(rate,nper,pmt,fv )
	=	$ 1,107.55
Where,
pv	=	Present value of cash flow	=	?
rate	=	Semi annual interest rate	=	2.50%
nper	=	Semi annual periods	=	8
pmt	=	Semi annual coupon payment	=	$             40
fv	=	Face value	=	$       1,000