Question

The currently quoted price (3 years before maturity date) of a 5-year bond with a nominal of 1,000,000 PLN, interest 4% pa, coupons paid each 4M, is PLN 900,000. Calculate PVB and determine whether investor should buy this bond (or not) for the quoted price, if expected YTM during maturity period is 8% pa?

Answer 1

Answer:

Price of bond = C/(1+r) + C/(1+r)^2 + ..... + (C+F)/(1+r)^n

C = (4% of 1000000 PLN) / 3 = $13333.33

r = 8% per annum = (8/3)% per 4 months

n = 3 years = 9 periods

Price of bond = 13333.33/(1.0267) + 13333.33/(1.0267)^2 + ..... + (1013333.33)/(1.0267)^9

= 894305.45 PLN

Quoted price = 900000 PLN > Present value of bond

Hence, bond is overpriced and investor should not buy at the quoted price.