Question

A two-year T-Note has a face value of $1,000 and 10% annual coupon rate. I The coupons are paid semi-annually. I If the six-month, 1-year, 1.5-year, and 2-year rates are 4%, 4.5%, 4.8%, and 5% per year, compounded semi-annually, what is the price of this bond?

Answer 1

Price of bond is the present value of cash flow from bond.
Semi annual coupon		=	Face Value x semi annual coupon rate
		=	$                1,000	x	5%
		=	$                      50
Semi annual period		Cash flow	Discount factor		Present Value
1		$               50	0.9804		$                 49.02
2		$               50	0.9588		$                 47.94
3		$               50	0.9363		$                 46.82
4		$         1,050	0.9135		$              959.18
Price of bond					$           1,102.96
Working:
Semi annual period		Semi annual interest rate			Discount factor			Calcuation of discount factor
1		0.0200			0.9804			1/(1+0.02)
2		0.0225			0.9588			1/((1+0.0225)*(1+0.02))
3		0.0240			0.9363			1/((1+0.024)*(1+0.0225)*(1+0.02))
4		0.0250			0.9135			1/((1+0.025)*(1+0.024)*(1+0.0225)*(1+0.02))