Question

A bond with a face value of $10,000 has 4 years and 28 days left to maturity.

The coupon rate is 4%.

Interest payments are paid quarterly.

The bond will be discounted at an annual rate of 8%.

Diagram the cash flows of this bond.

What is the current price of this bond?

How is the extra 28 days handled in the pricing of the bond?

What are the risks of this bond? (looking for 2 risks on bonds)

Answer 1

	Present Value of Cash Flow=(Cash Flow)/((1+i)^N)
	i=discount rate per period=(8/4)=2%=0.02
	N=Number of periods of cash flow
	Cash flow
	Quarterly Coupon=	$100	(10000*4%)/4
	Total Payment at maturity	$10,100	(10000+100)
	N	CF	PV=CF/(1.02^N)
	Quarterly Period	Cash Flow	Present Value
	0	$100	$100.00
	1	$100	$98.04
	2	$100	$96.12
	3	$100	$94.23
	4	$100	$92.38
	5	$100	$90.57
	6	$100	$88.80
	7	$100	$87.06
	8	$100	$85.35
	9	$100	$83.68
	10	$100	$82.03
	11	$100	$80.43
	12	$100	$78.85
	13	$100	$77.30
	14	$100	$75.79
	15	$100	$74.30
	16	$10,100	$7,357.30
		SUM	$8,742.23
	Current Price=Present Value (today ) of future cash flows
	Present Value after 28 days	$8,742.23
	Present Value today=8742.23/(1+(0.02*(28/90)))
	Present Value today=	$8,688.17
	Current Price of Bond	$8,688.17
	(Extra 28 days are handled by further discounting the price for 28 days
	Risks
	1. Interest rate risk
	The interest rate may go up . This will decrease bond price
	2. Risk of default in timely payment of interest and principal