Question

Calculate the price of a 10 percent coupon bond with eight years to maturity, given an appropriate discount rate of 12 percent, using both annual and semiannual discounting.

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =8

Bond Price =∑ [(10*1000/100)/(1 + 12/100)^k]     +   1000/(1 + 12/100)^8

k=1

Bond Price = 900.65

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =8x2

Bond Price =∑ [(10*1000/200)/(1 + 12/200)^k]     +   1000/(1 + 12/200)^8x2

k=1

Bond Price = 898.94