In: Finance
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)
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%.