Question

5. A bond offers a coupon rate of 7%, paid annually, and has a maturity of 18 years. If the current market yield is 9% (discount rate), what should be the price of this bond?

6. A bond offers a coupon rate of 10%, paid semiannually, and has a maturity of 6 years. If the current market yield is 6%, what should be the price of this bond?

Answer 1

Price of a bond = Present Value of Coupon Amount and Face Value discounted @ discount rate

5.)

Price of a bond = Present Value of Coupon Amount and Face Value discounted @ discount rate

Face Value = 1000

Coupon Amount = 0.07*1000 = 70

Discount Rate = 9%

Number of paymets =

Price of a bond = 70/(1+0.09)^1 + 70/(1+0.09)^2 + 70/(1+0.09)^3 + 70/(1+0.09)^4 + 70/(1+0.09)^5 + 70/(1+0.09)^6 +.................................... 70/(1+0.09)^18 + 1000/(1+0.09)^ 18

Price of a bond = 824.89 Answer

6)

Price of a bond = Present Value of semi-annual Coupon Amount and Face Value discounted @ semi-annual discount rate

Face Value = 1000

Coupon Amount = 0.10*1000 /2 = 50

Semi-annual Discount Rate = 3%

Number of paymets = 6*2 = 12  

Price of a bond = 50/(1+0.03)^1 + 50/(1+0.03)^2 + 50/(1+0.03)^3 + 50/(1+0.03)^4 + 50/(1+0.03)^5 + 50/(1+0.03)^6 +.................................... 50/(1+0.03)^12 + 1000/(1+0.03)^12

Price of a bond = 1199.08 Answer

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