Question

Currently, a bond has the face value of $1000, the remaining term of 2 years the coupon interest to be

paid every six months and its coupon rate is set as follows:

The coupon rate = The annual yield on 10-year GOC bond, prevailing at the time of payment

(call it X) + 3.5%

Suppose the required yield-to-maturity of the bond is 7% per annum and it is expected to stay the same.

X is expected to be 3%, 4%, and 4.5% and 5% at the end of the 1st 6-month period, 2nd 6-month period,3 rd 6-month period and 4th

6-month period respectively.

Find the current price of the bond. Then consider the same data and now assume that the required annual yield-to-maturity of

the bond denoted by k, will change the X as followed, k = X + 4%, but now X used here is the X prevailing at the

beginning of each 6-monthly period. Assume X at date zero is 2.5% while other expected values are the

same as given in the previous question. Recalculate the current price of the bond

Answer 1