Question

1) A 20-year bond pays a coupon of 8 percent per year (coupon paid semi-annually). The bond has a par value of $1000. What will the bond sell for if the nominal YTM is: a) 10 percent b) 6 percent c) 8 percent

Answer 1

Price of Bond = PV of Cash flows from it.

Part A:

PVF = 1/(1+r)^n

where r is YTM and n is period count

PVF 1- 40 = sum of PVF for period 1 t0 40

PVF is used to bring future CFs into Today's Value.

Part B:

Part C:

Period 11-40 140 CF P $ 40.00 $ 1,000.00 Bond Price VF @5% Disc CF 17.1591 $686.36 0.1420 $ 142.05 $828.41

Period 1-40 40 CF PVF @3% Disc CF $ 40.00 23.1148 $ 924.59 $1,000.00 0.3066 $ 306.56 Bond Price $ 1,231.15

Period 1-40 40 CF PVF @3% Disc CF $ 40.00 19.7928 $ 791.71 $ 1,000.00 0.2083 $ 208.29 Bond Price $1,000.00

PVF = 1/(1+r)^n

where r is YTM and n is period count

PVF 1- 40 = sum of PVF for period 1 t0 40

PVF is used to bring future CFs into Today's Value.