Question

You are considering investing in a $1000 face value 8% semi-annual coupon bond with 3 years left to maturity. Similar bonds are yielding 9.5% in the market, so the current price of this bond is _______, and if market interest rates drop to 8.25% the selling price of the bond would _____________

Answer 1

1.Information provided:

Face value= future value= $1,000

Coupon rate= 8%/2= 4%

Coupon payment= 0.04*1,000= $40

Time= 3 years*2= 6 semi-annual periods

Yield to maturity= 9.5%/2= 4.75% per semi-annual period

The price of the bond is computed by calculating the present value of the bond.

Enter the below in a financial calculator to compute the present value of the bond:

FV= 1,000

N= 6

I/Y= 4.75

PMT= 40

Press the CPT key and PV to compute the present value of the bond.

The value obtained is 961.6261.

Therefore, the current price of the bond is $961.6261 $961.63.

2.Information provided:

Face value= future value= $1,000

Coupon rate= 8%/2= 4%

Coupon payment= 0.04*1,000= $40

Time= 3 years*2= 6 semi-annual periods

Yield to maturity= 8.25%/2= 4.1250% per semi-annual period

The price of the bond is computed by calculating the present value of the bond.

Enter the below in a financial calculator to compute the present value of the bond:

FV= 1,000

N= 6

I/Y= 4.1250

PMT= 40

Press the CPT key and PV to compute the present value of the bond.

The value obtained is 993.4739.

Therefore, the selling price of the bond is $993.4739 $993.47.