Question

1. SJU Corp. issued a 10-year bond at a price of $1,000 two years ago in the US. The bond pays an annual coupon rate of 8% and the coupon interest is paid every six months. If the current market interest rate for this class of bond is 10%,

      a. what is the value of the bond right now?

      b. what was the market interest rate for the bond two year ago? Hint: no calculation

        needed (20 pts)

Answer 1

a

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =8x2

Bond Price =∑ [(8*1000/200)/(1 + 10/200)^k]     +   1000/(1 + 10/200)^8x2

k=1

Bond Price = 891.62

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %/coupons per year=1000*8/(2*100)

I/Y =10/2

N =8*2

FV =1000

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(10/(2*100),2*8,-8*1000/(2*100),-1000,)

b

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

1000 =∑ [(8*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^10x2

k=1

YTM% = 8

Using Calculator: press buttons "2ND"+"FV" then assign

PV =-1000

PMT = Par value * coupon %/coupons per year=1000*8/(2*100)

N =10*2

FV =1000

CPT I/Y

Interest rate = I/Y*2

Using Excel

=RATE(nper,pmt,pv,fv,type,guess)*no. of payments per year

=RATE(2*10,-8*1000/(2*100),1000,-1000,,)*2