You bought a bond at a price of $990 12 months ago. The bond pays coupons...

You bought a bond at a price of $990 12 months ago. The bond pays coupons semi-annually, has an annual coupon rate of 6%, a face value of $1,000 and will mature in 30 months from today. It just paid the coupon yesterday. The current YTM is 15% and it will remain the same till expiration. What is the price today? What is the expected price after 12 months?

Solutions

Expert Solution

Price today

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = 15%/2 (Semiannual YTM of bonds = annual YTM / 2)

nper = 5 (5 semiannual periods remaining until maturity)

pmt = 1000 * 6% / 2 (semiannual coupon payment = face value * coupon rate / 2)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $817.94

Price after 12 months

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = 15%/2 (Semiannual YTM of bonds = annual YTM / 2)

nper = 3 (3 semiannual periods remaining until maturity)

pmt = 1000 * 6% / 2 (semiannual coupon payment = face value * coupon rate / 2)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $882.98

jeff jeffy answered 1 year ago

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