Question

Suppose you have a Treasury bond with a principal of $1,000. The time to maturity is 20

years and the coupon rate is 8 percent with semi

-annual payments.

1. Calculate the price of the bond if the stated annual interest rate (compounded annually)

is: 6 percent, 8 percent, or 10 percent.

Answer 1

Principal of bond = 1000
Time of Maturity = 20
Coupon Rate = 8%(Semi Annual)
Coupon Coupon Rate *FaceValue/2 = 8%*1000/2 = 40

1. i)
Interest rate = 6%
Price = Coupon/(1+Ytm/2)^2t + Par Value/(1 + YTM/2)^2t = 40/(1+6%/2)^2t + 1000/(1 + 6%/2)^2t = 1231.15

ii)  Interest rate = 8%
Price = Coupon/(1+Ytm/2)^2t + Par Value/(1 + YTM/2)^2t = 40/(1+8%/2)^2t + 1000/(1 + 8%/2)^2t =1000
.
iii) Interest rate =10%
Price = Coupon/(1+Ytm/2)^2t + Par Value/(1 + YTM/2)^2t = 40/(1+10%/2)^2t + 1000/(1 + 10%/2)^2t = 828.41
Please discuss in case of doubt

answered by: anonymous