Question

Bond A has the following features:

         Face value = $1,000,       

Coupon Rate = 8%,       

Maturity = 10 years, Yearly coupons

         The market interest rate is 4.84%

         If interest rates remain at 4.84%, what will the price of bond A be in year 1?

Answer 1

No of periods = 10 years

Coupon per period = Coupon rate * Face value

Coupon per period = 8% * $1000

Coupon per period = $80

Bond price in 1 year

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

Bond Price = $80 / (1 + 4.84%)¹ + $80 / (1 + 4.84%)² + ...+ $80 / (1 + 4.84%)⁹ + $1000 / (1 + 4.84%)⁹

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

Bond Price = $80 * ((1 - (1 + 4.84%)^-9) / 4.84%) + $1,000 / (1 + 4.84%)⁹

Bond Price = $572.70 + $653.52

Bond Price in 1 year = $1226.22