Question

Suppose you are considering buying a $2,000,000 face value of bond in the secondary market. The bond was issued in 2016 and is due in 2036. It is now 2020. In 2016, the appropriate market interest rate to price the bond was 8%. This bond pays quarterly interest payments. Currently, other bonds with similar risk charateristics are being issued into the market with 12% coupons. How much would you be willing to pay for this bond? Please tell me the price per $2,000,000 face value and the % of par. What is the name type of bond given its current price relative to its face value? on excel if you can please

Answer 1

Bond Price:
It refers to the sum of the present values of all likely coupon payments plus the present value of the par value at maturity. There is inverse relation between Bond price and YTM ( Discount rate ) and Direct relation between Cash flow ( Coupon/ maturity Value ) and bond Price.

Price of Bond = PV of CFs from it.

Bond price at the end of 2020:

Period	Cash Flow	PVF/ PVAF @2 %	Disc CF
1 - 64	$           60,000.00	35.9214	$      2,155,284.89
64	$     2,000,000.00	0.2816	$         563,143.41
Bond Price			$     2,718,428.30

As Coupon Payments are paid periodically with regular intervals, PVAF is used.
Maturity Value is single payment. Hence PVF is used.

Periodic Cash Flow = Annual Coupon Amount / No. times coupon paid in a year
Disc Rate Used = Disc rate per anum / No. of times coupon paid in a Year

What is PVAF & PVF ???
PVAF = Sum [ PVF(r%, n) ]
PVF = 1 / ( 1 + r)^n
Where r is int rate per Anum
Where n is No. of Years

How to Calculate PVAF using Excel ???
+PV(Rate,NPER,-1)
Rate = Disc rate
Nper = No. of Periods