Question

CEPS Group has a 8.45 percent coupon bond outstanding that matures in 13 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 8.36 percent compounded semiannually?

Answer 1

> Formula

P0 = Coupen Amount * PVAF (r, n) + Face Value * PVIF (r, n)

where PVAF = Present Value Annuity Factor

           PVIF = Present Value interest factor

> Calculation

Po = [ (8.45% / 2 ) * 1000 ] * PVAF [(8.36% / 2 ), ( 13 * 2 ) ] + 1000 * PVIF [(8.36% / 2 ), ( 13 * 2 ) ]

     = [ 4.225% * 1000 ] * PVAF [4.18%, 26] + 1000 * PVIF [4.18%, 26]

      = 42.25 * [ 1/1.0418 + 1/1.04182 + 1/1.04183 + .......+ 1/1.041826 ] + 1000 * [ 1/1.0418 ]26

      = 42.25 * 15.6739 + 1000 * 0.3448

      = $ 1007.02

Thus the market price of bond is $ 1007.02.

Hope you understand the solution.