Question

An investor who owns a corporate bond with an 8.50% coupon rate that pays coupons semiannually and matures in 18 months is considering its sale. If the required rate of return on the bond is 10% with continuous compounding, and the face value is $100, then the price of the bond is

Answer 1

EAR =[ e^(Annual percentage rate) -1]*100

10=(e^(APR%/100)-1)*100

APR% = 9.531

EAR = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100

9.531 = ((1+Stated rate%/(2*100))^2-1)*100

Stated rate% = 9.314

K = Nx2

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

k=1

K =1.5x2

Bond Price =∑ [(8.5*100/200)/(1 + 9.314/200)^k]     +   100/(1 + 9.314/200)^1.5x2

k=1

Bond Price = 98.88