Question

Consider a 6 7/8 bond, maturing 8/15/94, trading with a yield of 3.504% (annualized) 8 for settlement 2/15/94. Calculate the trading price of this bond. (M=100,000)

Answer 1

Bond Issue Date = Settlement Date = 2/15/94

Bond Maturity Date = 8/15/94

Bond Maturity Period = Maturity - Settlement = 6 months

Yield = 3.504% per annum or 1.752 % per 6 months

Coupon Rate = 6 7/8 % of Par Value of M = 100000

Semi Annual Coupon = Coupon Rate x (1/2) x 100000 = $ 3437.5

Therefore, Bond Trading price = P = (Par Value + Semi Annual Coupon) / (1 + 0.01752)

= 103437.5 / (1.01752)

= $ 101656.4785

NOTE: It has been assumed that coupon is paid semi annually and compounding is also done semi annually.