Question

In an economic environment where the market interest rate is 14%, how much is the secondary market price of a bond with a coupon interest of 18% with a nominal value of TL 1000 with 3 years remaining to maturity?

Answer 1

Market price of a bond can be calculated as: C1/(1+r)+C2/(1+r)^2+.....(Cn+F)/(1+r)^n; where C1 to Cn are coupon payments, F is face valuebof the bond, r is the market interest rate and n is the remaining years to Maturity.

Given that coupon rate is 18% with nominal value of 1000, So, Coupon payment is 18%*(1000)= 180. Also given r is 14% and remaining years to maturity are 3.

On Substituting, Market price of the bond= 180/1.14+180/1.14^2+(180+1000)/1.14^3= 157.89+138.5+796.47= 1092.86

So, Market Price of bond is $1092.86