Question

Jason Greg is a recent retiree who is interested in investing some of his savings in corporate bonds. Listed below are the bonds he is considering adding to his portfolio.

Bond A has a 7.5% semiannual coupon, matures in 12 years, and has a $1,000 face value.

      Bond B has a 10% semiannual coupon, matures in 12 years, and has a $1,000 face value.

      Bond C has an 11.5% semiannual coupon, matures in 12 years, and has a $1,000 face   value.

Each bond has a YTM of 10%.

Calculate the price of each of these bonds.

Answer 1

• Bond A

  Interest Annually = 1000*7.5% = 75

  Interest Semi annually = 37.5

  Period = 12 years or 24 half years

  Redemption value = 1000

  Required rate of return 10% or say 5% for half year

  Current price: (Interest* sum of PVF for 24 times) + (Redemption value * PVF for 24th)

                  = (37.5*13.799) + (1000*.310)

                  = 827.46

  Bond B

  Interest = 1000*10% = 100 or say 50 semi anu.

  Current price:

  = (50*13.799) + (1000*.310)

                  = 1000

  Bond C

  Interest = 1000*11.5% = 115 or say 57.5 semi annually

  Current Price:

                  = (57.5*13.799) + (1000*.310)

                  = 1103.44

  Thanks