Question

1. A 10-year corporate bond has a coupon rate of 9% with quarterly payments. If interest rates rise to 8% on similar bonds, then what is the value of the bond in the marketplace?

Answer 1

ace/Par Value of bond = $1000

Quarterly Coupon Bond = $1000*9%*1/4

= $22.50

No of Coupon payment(n) = No of years to maturity*4 = 10 years*4

= 40

Quarterly YTM = 8%/4

= 2%

Calculating the Market price of Bond:-

Price= 22.50*[1-(1+0.02)^(-40)]/0.02 + 1000/(1+0.02)^(40)

Price= 22.50*[1-0.45289041518]/0.02 + 1000/2.20803966361

Price = $615.498 + $452.890

Price = $1068.39

So,the the value of the bond in the marketplace is $1068.39

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