Question

1. SJU Corp. issued a 10 year bond at a price of $1,000 two years ago in the US. The bond pays an annual coupon rate of 8% and the coupon interest is paid every six month. If the current market interest rate for this class of bond is 10%,

      a. what is the value of the bond right now?

      b. what was the market interest rate for the bond two year ago? Hint: no calculation

        needed

Answer 1

a). Bond's Market Value = PV of Coupon Payment + PV of Maturity Value

= [Periodic Coupon Payment * {(1 - (1 + r)^-n) / r}] + [Face Value / (1 + r)^n]

= [{(8%/2)*$1,000} * {(1 - (1 + 0.10/2)^-(8*2)) / (0.10/2)}] + [$1,000 / {1 + (0.10/2)}^(8*2)]

= [$40 * {0.5419 / 0.05}] + [$1,000 / 2.1829]

= [$40 * 10.8378] + $458.11

= $433.51 + $458.11 = $891.62

b). Market interest rate two year ago is 8%, which is equal to the bond's coupon rate. As the bond was issued at par, two years ago, which means coupon rate is equal to YTM.