Question

The government has a bond pays annual coupons of 5 which have a nominal value of 100. The bond matures in three years. The interest rate for the first year is 4.00%, the interest rate for the second year is 4.50% and the interest rate for the third year is 5.82%. simple interest rates should be used to solve this problem.

1. Firstly, you have to calculate the value of the bond ?

2. Secondly, is it necessary to find the yield on the bond?

3. Thirdly, what is the value of a corporate bond that promises payments similar to those of the government bond when investors demand a 3.2% credit spread?

4. The fourth step is to find the relationship between bond prices and yield?

Answer 1

Solution 1

Coupon Rate is 5 /100 = 5%

Value of bond

Interest 1 st year = 1/1.04 * 5 = 4.80

Interest 2 st year = 1/1.045 * 5 = 4.58 ( 2 year discount)

Interest 3 st year = 1/1.05 * 5 = 4.32   ( 3 year discount)

Bond value after three year   = 1/1.05(3) * 100 = 86.38

Present value of the bond = 4.8+4.58+4.32+86.38 = 100.08

Solution 2

Yes It is necessary to find yield. because on the basis of yield we will get actual value value of bond.

hance yield value is 5/100 = 5%