Question

1. Just-Buss Corporation has issued a bond that has a 10% coupon rate, payable quarterly. The bonds mature in 10 years, have a face value of $1,000 and a yield to maturity of 12%. What is the price of the bond?

What must be the price of a $10,000 bond with a 12% coupon rate, semi-annual coupons, and five years to maturity if it has a yield to maturity of 10%?

Answer 1

a)

Coupon = (0.1 * 1,000) / 4 = 25

Number of periods = 10 * 4 = 40

Rate = 12% / 4 = 3%

Price of bond = Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Price of bond = 25 * [1 - 1 / (1 + 0.03)⁴⁰] / 0.03 + 1000 / (1 + 0.03)⁴⁰

Price of bond = 25 * 23.114772 + 306.556841

Price of bond = $884.43

Keys to use in a financial calculator: 2nd I/Y 4, FV 1000, PMT 25, I/Y 12, N 40, CPT PV

a)

Coupon = (0.12 * 10,000) / 2 = 600

Number of periods = 5 * 2 = 10

Rate = 10% / 2 = 5%

Price of bond = Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Price of bond = 600 * [1 - 1 / (1 + 0.05)¹⁰] / 0.05 + 1000 / (1 + 0.05)¹⁰

Price of bond = 600 * 7.721735 + 6,139.132535

Price of bond = $10,772.17

Keys to use in a financial calculator: 2nd I/Y 2, FV 10000, PMT 600, I/Y 10, N 10, CPT PV