Question

Consider a bond paying a coupon rate of 8% per year semiannually when the market interest rate is only 5%. The bond has twenty years until maturity.

1. Find the bond’s price today.
2. Find the bond’s price six months from now after the next coupon is paid if the interest rate rises to 7%.
3. What is the total rate of return on the bond?

Answer 1

Solution:

a.) To find the current bond price, we need to put the following values in the financial calculator:

Input	20*2=40	5/2=2.5		(8%/2)*1000=40	1000
TVM	N	I/Y	PV	PMT	FV
Output			-1376.54

Current Bond Price = $1,376.54

b.) To find the bond price six months from now we need to put the following values in the financial calculator:

Input	40-1=39	7/2=3.5		(8%/2)*1000=40	1000
TVM	N	I/Y	PV	PMT	FV
Output			-1105.51

Bond Prince Six months From now =$1,105.51

c.) Total Return =(P_0.5 - P₀ + Divided)/ P₀
= ($1,105.51 - $1,376.54 + $40)/ $1,376.54
= -$231.03 / $1,376.54
= -0.1678 or -16.78%