Question

Matt purchases a 20-year par value bond with 8% semiannual coupons at a price of 1772.25. The bond can be called at par value X on any coupon date starting at the end of year 15. The price guarantees that Matt will receive a nominal semiannual yield of at least 6%. Bert purchases a 20-year par value bond identical to the one purchased by Matt, except that it is not callable. Assuming a nominal semiannual yield of 6%, the cost of the bond purchased by Bert is P. Calculate P.

Answer 1

WE will use PV function of excel to calculate the purchase price of bond purchased by Bert

The bond that Bert purchased has following features

Rate = 6% semi annual yield

Term = 20 years = 40 semi annual periods (NPER)

Coupon = 8% semi annual = 8% x 1000 x 1/2 = $ 40 semi annual (PMT)

Maturity value = $1000 to be received at maturity (FV)

Type = 0 (Coupons paid to Bert at the end of period)

Using PV function, the purchase price of bond purchased by Bert  

= PV( 6%,40,40,1000,0) = - $699.07 (The negative sign indicates the cash outflow to buy the bond)