Consider a bond that pays annual coupons and matures in 5.5 years from today when the...

Consider a bond that pays annual coupons and matures in 5.5 years from today when the last coupon is paid. The principal is $100 and the annual coupon is $10 and the yield to maturity (compounded annually with a 30/360 daycount) is 10%. Find the flat price of the bond today.

Solutions

Expert Solution

Following is the given information about Bond in the question:

Principal Price : $100

Annual Coupon: $10

YTM : 10%

Maturity Period : 5.5 Years

Now, Flat price of a bond is:

Coupon Amount + Coupon Amount + ………… + Maturity Amount

(1+ YTM)¹ (1+ YTM)² (1+ YTM)ⁿ

= 10 + 10 + 10 + 10 + 10 + 5 + 100

(1+.10)¹ (1+.10)²(1+.10)³(1+.10)⁴ (1+.10)⁵(1+.10)^5.5 (1+.10)^5.5

= 10 × 0.9091 + 10 × 0.82645 + 10 × 0.75131 + 10 × 0.68301 + 10 × 0.62092 + 5 × 0.59135 + 100 × 0.59135

= $100

Therefore, the flat price of the bond as on today is $100.

jeff jeffy answered 1 year ago

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