Question

An n-year bond has face and redemption amount of $100. The bond has level semiannual coupons...

An n-year bond has face and redemption amount of $100. The bond has level semiannual coupons and the yield rate is a nominal annual rate of 6% compounded semiannually. The bond’s book value just after the 8th coupon is $121.30 and just after the 10th coupon, the book value is $120.39. Find the original purchase price of the bond.

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Answer #1

Answer: $124.94

Explanation:

Note: Since no information is given about effective rate of interest & also mentioned that the yield rate is a nominal annual rate

Difference between the bond’s book value after the 8th coupon & after the 10th coupon (ie 2 periods)

= $121.30 - $120.39 = $0.91

Amortization of premium of bonds per period = $0.91 / 2 years = $0.455

Total amortization of premium of bonds till 8th coupon = $0.455 * 8 = $3.64

Original purchase price of the bond = Bond’s book value just after the 8th coupon + Total amortization of premium of bonds till 8th coupon = $121.30 + $3.64 = $124.94

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