Question

A 5% coupon rate bond issues by Google has a face value of $1000, pays interest semiannually, and will mature in 20 years. If the current market rate is 2% interest compounded semiannually, what is the bond’s price?

Answer 1

Face Value (FV) = $1,000

Coupon rate = 5%

Interest rate is paid semi-annually.

Coupon payment = ($1,000 * 0.05)/2 = $25

Market interest rate = 2% compounded semiannually

Adjusted market interest rate (i) = 2%/2 = 1%

Time period (n) = 20 * 2 = 40 period

Calculate the Bond Price -

Bond Price = Coupon payment (P/A, i, n) + Face value (P/F, i, n)

Bond Price = $25 (P/A, 1%, 40) + $1,000 (P/F, 1%, 40)

Bond price = ($25 * 32.8347) + ($1,000 * 0.6717)

Bond price = $820.8675 + $671.7

Bond price = $1,492.57

The bond's price is $1,492.57