Question

Arthur bought a semiannual coupon bond 12 years ago. The bond has a coupon rate of...

Arthur bought a semiannual coupon bond 12 years ago. The bond has a coupon rate of 9% and matures in 8 years. The next interest payment is scheduled for six months from today. If the yield on similar risk investments is 11.5%, what is the expected price of the bond two years from today?

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Answer #1

Two years from today, the bond will have 6 years left until maturity.

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = 11.5%/2 (Semiannual YTM of bonds = annual YTM / 2)

nper = 6 * 2 (6 years remaining until maturity with 2 semiannual coupon payments each year)

pmt = 1000 * 9% / 2 (semiannual coupon payment = face value * coupon rate / 2)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $893.75

expected price of the bond two years from today is $893.75

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