Question

Calculate the market value (amount of cash proceeds) of the $1,000,000 bond we are selling given that the annual contract rate is 0%, market interest rate is 4%, and the bond is due in 5 years. Assume interest is paid every six months. Show your work.

Answer 1

I am assuming yield rate and coupon rate both to 4%

Face Value = $1,000,000

Semiannual Coupon rate = 4%/2 = 2%

Semiannual Yield rate,r = 4%/2 = 2%

Total Payments(Semiannual), t = 5*2 = 10

Coupon Payment = 1,000,000*2%, C = $20,000

Solving this we get Current Market Price = $1,000,000

PS : I have assumed both yield rate and coupon rate to be 4% annual. However, if question details are missing and you have different yield or coupon rate, please let me know in the comment section. I'll clear your doubt. However, if you have different coupon rate, just change coupon rate and coupon payments or if you have different yield rate just change the yield rate i.e r.

But if you have any kind of doubt, please ask me in the comment section.