Question

Current Price		$980
Maturity		10 years
Coupon rate		5%
Coupon payments		Semi-annual
Face Value		$1,000

a. Calculate the bonds current yield and the bonds equivlant yield.

b. If the bond had an equivlant yield of 6%, what will the price of the bond be?

Answer 1

	Current Price		$980
	No of Payments		20	10*2
	Coupon Rate - Semi annual		2.50%	5%/2
	Coupon Amount - Semi annual		25	1000*2.50%
	Face Value		$1,000
a	Current Yield = Annual Coupon/Current Price			50/980		5.10%
	Value of Bond = Present Value of coupon payment + Present Value of proceeds
	Alternatively, Yield can also be calculated using the Rate function in excel, we get
	2.63%		RATE(20,25,-980,1000)
	Bond Equivalent annual Yield		5.26%
b	Value of Bond = Present Value of coupon payment + Present Value of proceeds
	No of payments	Cash flow	Discount factor @ 3%	Present Value
	1	25	0.970874	24.27
	2	25	0.942596	23.56
	3	25	0.915142	22.88
	4	25	0.888487	22.21
	5	25	0.862609	21.57
	6	25	0.837484	20.94
	7	25	0.813092	20.33
	8	25	0.789409	19.74
	9	25	0.766417	19.16
	10	25	0.744094	18.60
	11	25	0.722421	18.06
	12	25	0.70138	17.53
	13	25	0.680951	17.02
	14	25	0.661118	16.53
	15	25	0.641862	16.05
	16	25	0.623167	15.58
	17	25	0.605016	15.13
	18	25	0.587395	14.68
	19	25	0.570286	14.26
	20	1025	0.553676	567.52
				925.61
	Since semi annual, yield is 3% (6%/2)
	Present Value of Bond - $ 925.61