Question

One year ago, Alpha Supply issued 5-year bonds at par. The bonds have a coupon rate of 6 percent and pay interest semi-annually. Today, the market rate of interest on these bonds is 6.5 percent.

What is the price of these bonds today? $

Compared to the issue price, by what percentage has the price of these bonds changed?  %

(Use a negative to denote a decrease and a positive value to denote an increase)

Answer 1

1.Information provided:

Face value= future value= $1,000

Time= 5 years - 1 year = 4 years*2= 8 semi-annual periods

Coupon rate= 6%/2= 3%

Coupon payment= 0.03*1,000= $30 per semi-annual period

Yield to maturity= 6.5%/2= 3.25% per semi-annual period

The price of the bond today is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 30

I/Y= 3.25

N= 8

Press the CPT key and PV to compute the present value.

The value obtained is 982.63.   

Therefore, the price of the bond today is $982.63.

2.Change in price of the bond:

= $982.63 - $1,000/ $1,000

= -$17.37 /  $1,000

= -0.0174*100

= -1.74%.