Question

You bought a $1000 corporate bond for $910 three years ago. It is paying $25 in interest at the end of every 6 months, and it matures in 6 more years.

(a) Compute its coupon rate.

(b) Compute its current value, assuming the market interest rate for such investments is 4% per year, compounded semiannually.

Answer 1

	Answer = 1)
	Calculation of coupon Rate
	Par value of the bond issued is   =			$1,000
	Half yearl coupon =			$25.00
	Annual Coupon Amount			$50.00
	Coupon Rate = (Annual Coupon / Par Value ) X 100			5%
	Answer = 5%
	Answer = 2)
	Step 2: Calculate number of Periods to Maturity
	Number of years to maturity = 6 years
	Interest is paid semi annyally so total period = 6 Years * 2 = 12 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 4%
	Bonds interest is paid semi annualy means so discounting factor = 4 % /2= 2 %
	PVF = 1 / Discount rate = 1/ 1.02
	Result of above will again divide by 1.02 , repeat this lat period
	Period	Interest	Amount	PVF @ 2%	PresentValue
	1	Interest	$25.00	0.9804	$24.51
	2	Interest	$25.00	0.9612	$24.03
	3	Interest	$25.00	0.9423	$23.56
	4	Interest	$25.00	0.9238	$23.10
	5	Interest	$25.00	0.9057	$22.64
	6	Interest	$25.00	0.8880	$22.20
	7	Interest	$25.00	0.8706	$21.76
	8	Interest	$25.00	0.8535	$21.34
	9	Interest	$25.00	0.8368	$20.92
	10	Interest	$25.00	0.8203	$20.51
	11	Interest	$25.00	0.8043	$20.11
	12	Interest	$25.00	0.7885	$19.71
	12	Bond Principal Value	$1,000.00	0.7885	$788.49
		Total			$1,052.88
		Current Bonds Price =			$1,052.88
		Answer = $ 1052.88