Question

What is the fair value of a $1,000 face value, fixed coupon bond with a coupon...

What is the fair value of a $1,000 face value, fixed coupon bond with a coupon rate of 3.4%, yield-to-maturity of 3.7%, semi-annual coupon payments and 8 years to maturity? Group of answer choices

Homework Answers

Answer #1

No of periods = 8 years * 2 = 16 semi-annual periods

Coupon per period = (Coupon rate / No of coupon payments per year) * Face value

Coupon per period = (3.4% / 2) * $1000

Coupon per period = $17

Bond Price = Coupon / (1 + YTM / 2)period + Face value / (1 + YTM / 2)period

Bond Price = $17 / (1 + 3.7% / 2)1 + $17 / (1 + 3.7% / 2)2 + ...+ $17 / (1 + 3.7% / 2)16 + $1000 / (1 + 3.7% / 2)16

Using PVIFA = ((1 - (1 + Interest rate)- no of periods) / interest rate) to value coupons

Bond Price = $17 * (1 - (1 + 3.7% / 2)-16) / (3.7% / 2) + $1000 / (1 + 3.7% / 2)16

Bond Price = $233.59 + $745.80

Bond Price = $979.39

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