Question

A 10-year, $20,000 bond was issued at a nominal
interest rate of 8% with semiannual compounding.
Just after the fourth interest payment, the bond will
be sold. Assume that an effective interest rate of
101/4% will apply, and calculate the price of the bond.

Answer 1

Ans. Face value, F = $ 20000

Coupon rate per period, c = 8% /2 = 4%

Coupon payment per period, C = c*F = $800

Number of periods, n = 10*2 = 20

Periods left = n - 4 = 16

Interest rate per period, i = (101/4%)/2 = 12.625%

Price of the bond (P) after 2 years is present value of the bond after 2 years at the rate of interest of 12.625%.

Therefeore,

P = 800*[((1+0.12625)16-1)/0.12625*(1+0.12625)16] + 20000/(1+0.12625)16

=> P = $6883.3

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