Question

TURN YOUR ANSWER IN WORD.

Calculate the price of an AA-rated, 20-year, 8% coupon (paid annually) corporate bond (Par value = $1,000) which is expected to earn a yield to maturity of 10%. Use the three methods

we learned in class:

a.     TVM

Equation (Just plug in the corresponding values in the formula)

b.     Financial

Calculator (indicate the keys you enter and WRITE THE ANSWER)

c.     Excel.

(Just write the function and arguments as you’d enter it in Excel)

Answer 1

Given about a bond,

years to maturity = 20 years

Face value = $1000

coupon rate = 8%

YTM = 10%

a). TVM equation,

Using TVM equation, PV of the bond = ∑(C/(1+r)^t) + F/(1+r)^t

=> PV of the bond =  ∑(80/(1.10)^20) + 1000/(1.10)^20

=> PV = 80*(1 - (1.10^-20))/0.10 + 1000/(1.10)^20 = $829.73

b). Financial calculator,

FV = 1000

PMT = 80

N = 20

I/Y = 10 compute for PV, we get PV = -829.73

So, price of the bond = $829.73

c). on excel, we use formula =PV(rate,nper,pmt,pv,fv,type)

use =PV(10%, 20, 80, 1000, 0, 0) = -829.73

So, price of the bond = $829.73