Question

You are thinking of purchasinga bond with a coupon rate of 6.0% and makes semiannual payments. The yield to maturity is 6.3% and the bond matures in 21 years. What is the market price if the bond has a par value of $1,000? AND Do you expect the price of the bond to Increase OR decrease over the next year?

Answer 1

We are given,

Coupon rate = 6%

Semiannual Coupon = 6%/2 * 1000 = $30

Ytm(r) = 6.3%

No of periods = 21yr * 2 = 42

Market Price(PV) = ?

We can calculate PV using Financial calculator or by using excel,

Future Value	$1,000
pmt	30
interest	6.3%
No of years	42
Present Value	$965	(=PV(6.3%/2,42,-30,-1000,0))

Hence market price of bond = $965.

The price of the bond will increase over the next year as currently it is below its par value. At maturity, the price will be equal to its par value.

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answered by: anonymous