Question

5 years ago P&G issue debt with following parameters: $1000 face value, 6% coupon, paid semi-annually, 10 years to maturity

1)It today current interest rate for bonds are selling at annual yield to maturity of 4% what is price of P&G bond today?

2)If you were to buy bond in part 1 at price you calculatedand 4 years later interest rates and maturities are now 2%

A. What is price of bond at that time?

B. What would total % return be?

Answer 1

1

K = Nx2

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

k=1

K =5x2

Bond Price =∑ [(6*1000/200)/(1 + 4/200)^k]     +   1000/(1 + 4/200)^5x2

k=1

Bond Price = 1089.83

2

a

K = Nx2

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

k=1

K =1x2

Bond Price =∑ [(6*1000/200)/(1 + 2/200)^k]     +   1000/(1 + 2/200)^1x2

k=1

Bond Price = 1039.41

b

rate of return = ((selling price+coupon)/purchase price-1)*100

=((1039.41+4*60)/1089.83-1)*100= 17.395%