Consider a bond (with par value = $1,000) paying a coupon rate of 7% per year semiannually when the market interest rate is only 6% per half-year. The bond has 3 years until maturity. |
a. |
Find the bond's price today and 6 months from now after the next coupon is paid. (Round your answers to 2 decimal places. Omit the "$" sign in your response.) |
Current price ____________ | $ |
Price after six months __________ | $ |
b. |
What is the total (6-month) rate of return on the bond? (Omit the "%" sign in your response.) |
Rate of return _____________ | % |
Answer a.
Current Price:
Par Value = $1,000
Annual Coupon Rate = 7%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50%*$1,000 = $35
Semiannual Interest Rate = 6%
Time to Maturity = 3 years
Semiannual Period to Maturity = 6
Price of Bond = $35 * PVIFA(6%, 6) + $1,000 * PVIF(6%, 6)
Price of Bond = $35 * (1 - (1/1.06)^6) / 0.06 + $1,000 /
1.06^6
Price of Bond = $877.07
Price after six months:
Par Value = $1,000
Semiannual Coupon = $35
Semiannual Interest Rate = 6%
Semiannual Period to Maturity = 5
Price of Bond = $35 * PVIFA(6%, 5) + $1,000 * PVIF(6%, 5)
Price of Bond = $35 * (1 - (1/1.06)^5) / 0.06 + $1,000 /
1.06^5
Price of Bond = $894.69
Answer b.
Rate of Return = ($894.69 + $35 - $877.07) / $877.07
Rate of Return = 6.00%
Get Answers For Free
Most questions answered within 1 hours.