Question

Compute Bond Price Compute the price of a 4.75 percent coupon bond with 15 years left to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond?

Answer 1

Price can be calculated using the PV function of excel. Inputs are:

Rate = interest rate per period = semin annual interest rate = 6.25% / 2 = 3.1250%

Nper = Number of periods = number of half years = 2 x 15 = 30

PMT = payment per period = semin annual coupon = 4.75%/2 x Par value = 4.75%/2 x 1,000 = 23.75

FV = future value = par value = 1000

Hence, price = - PV (Rate, Nper, PMT, FV) = - PV (3.125%, 30, 23.75, 1000) = $ 855.34

Since price < par value, this is a discount bond.