Question

Q3) What is the price of a $1,000 par value, semi-annual coupon bond with 18 years to maturity, a coupon rate of 08.60% and a yield-to-maturity of 05.10%? (1 point) Q4) What is the price of a $1,000 par value, 18 year, annual coupon bond with a 05.80% coupon rate and a yield to maturity of 04.90%? (1 point) Q5) You bought a 20-year, 07.30% semi-annual coupon bond today and the current market rate of return is 06.30%. The bond is callable in 7 years with a $50 call premium. What price did you pay for your bond? (2 points)

Answer 1

Q3

The price of a bond is the present value of the expected cash flows on the bond discounted at YTM. Hence the price is $1409.02/- ,computed as follows-

Year	Cash flow	PVF/[email protected]%	Present Value
1-36	43	23.3749	1005.12
36	1000	.4039	403.90
			1409.02

Note: *Since it is semi annual coupon bond, Interest is taken as 43(1000*8.6%/2), YTM is taken as 2.55(5.1/2) and period is taken as 36(18*2)

* Since no information is provided redeeemed at par.

Q4

Year	Cash Flow	PVF/[email protected]%	Present Value
1-18	58	11.7814	683.32
18	1000	.4227	422.70

Hence the price is $1106.02/-

  * Since no information is provided redeeemed at par.

Q5

The price of a bond is the present value of the expected cash flows on the bond discounted at an interest rate that is appropriate to the risskness of that bond. Hence here 6.30% is taken which is the current market rate of return.

Year	Cashflow	PVF/[email protected]%	Present Value
1-14	36.5	9.1247	333.05
14	1050(1000+50)	.4251	446.36

Hence the price is $779.41/-