Question

Calculate the price of an AA-rated, 5-year, 6%

coupon (paid semiannually) corporate bond (Par value = $1,000) which is expected to earn a yield to maturity of 6%.

a.       Plug in values in the formula

b.      Estimate the price in your calculator: Write the

keys you enter.

c.      Write the formula and arguments in Excel format.

d.       Is this a discount, premium or par bond? Explain

the relationship between  

Answer 1

Number of Periods =5*2 =10
Semi annual coupon =6%*1000/2 =30
Par value =1000
Semi annual YTM =6%/2 =3%
a. Price of Bond Using formula =PMT*((1-(1+r)^-n)/r)+Par value/(1+r)^n =30*((1-(1+3%)^-10)/3%)+1000/(1+3%)^10 =1000

Price using financial calculator
I/Y=3%;N=10;PMT =30;FV=1000;CPT PV
PV =1000

Price using Excel format =PV(Rate, N, -PMT,-FV) =PV(3%,10,-30,-1000) =1000

This is par bond. If coupon rate is same as YTM it is par bond. If YTM is greater than coupon rate , then it is discount bond. If YTM is less than coupon rate then it is premium bond