Question

In: Finance

A $1,000 par value bond has coupon rate of 5% and the coupon is paid semi-annually....

A $1,000 par value bond has coupon rate of 5% and the coupon is paid semi-annually. The bond matures in 20 years and has a required rate of return of 10%. Compute the current price of this bond?

Expert Solution

Par value of the bond = 1000

Coupon rate = 5%

Annual YTM = 10%

Time to maturity = 20 years

The coupons are paid semi-annually, so we will consider semi-annual number of periods, semi-annual YTM and semi-annual coupon payments

Semi-annual coupon rate = 5%/2 = 2.5%

Semi-annual coupon payment = 2.5%*1000 = 25

Semi-annula number of periods = 20*2 = 40

Semi-annual YTM = 10%/2 = 5%

Method 1: Current price calculation using ba ii plus calculator

Inster the values in the calculator

N = 40

I/Y = 5

PMT = 25

FV = 1000

CPT -> PV [Press CPT and then press PV]

We get, PV = 571.0228412 ~ 571.02

Answer -> Current Price of the bond = 571.02

Method 2: Current price calculation using Excel

We can use the PV function in Excel to compute the current price of the bond as shown below:

=PV(5%,40,25,1000) = 571.0228412

Answer -> Current Price of the Bond = 571.02

jeff jeffy answered 3 months ago

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