Question

(a) If a coupon bond has a face value of $5000, a yearly coupon payment of $100, and a two year maturity, what is the current price, given i=3%?

(b) What if i=4%?

Does the previous problem show the expected relationship between the interest rate and the price? Explain.

Answer 1

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 3%

And n is the no of Compounding periods 2 years

Coupon 100

=

= 4904.33

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 4%

And n is the no of Compounding periods 2 years

Coupon 100

=

= 4811.39

The more the interest rate in market increases, the less will be the value of a Bond.