Question

The Indonesian government issued a government bond in 2004, with a maturity of 20 years, the coupon rate is 13%. Currently (the year 2014), the Indonesian government issues government bonds with a maturity of 20 years with a coupon rate of 8%. Note, that the coupon rate decreases from 13% to 8%. Calculate the fair value for the first bond (issued in 2004, and will mature in 2024). The par is 1,000,000 and the yield is 13%

Answer 1

Fair value of the first bond at 2004=1000000

Fair value of the first bond at 2014=Par*coupon rate/yield*(1-1/(1+yield)^n)+Par/(1+yield)^n=1000000*13%/8%*(1-1/1.08^10)+1000000/1.08^10
=1335504.06994707