Question

Let us compute the price of a Chrysler bond recently listed in the Wall Street Journal. The bonds have a 10% coupon rate, a $1,000 par value (maturity value), and mature in two years. Assume semiannual compounding and that market rates of interest are 12%.

Answer 1

Given that;
Par value or face value is $1000
Coupon rate is 10%.
As the interest is compounded semiannually, the semiannual coupon rate =10%/2=5%
Semiannual coupon payment=(Semiannual coupon rate)*(Par value)=5%*1000=50

Time period is 2 years, for semiannual compounding, the number of periods is 2*2=4
Annual interest rate is 12%, so the semiannual interest rate is 12%/2=6%.

We can determine the present value of the bond using excel as;

Answer: Hence, the present value is $965.35