Question

You are holding a bond with an annual coupon rate of 6% that matures in 15 years. Interest is paid semiannually. Bonds recently issued of similar risk have a coupon rate of 5%. What should your bond sell for in the secondary market?

Answer #1

Price of a bond is mathematically represented as:

where P is price of bond with periodic coupon C, M face value, n periods to maturity, i periodic YTM.

For this question, YTM would be same as coupon of the recently issued comparable bond, which is 5%.

Periodic YTM, i = 5%/2 = 2.5%, n = 15 * 2 semi-annual periods = 30 semi-annual periods, M = $1000 (assume), C= $1000 * 6%/2 = $30 (semi-annually)

P = $627.91 + $476.74

**P = $1,104.65**

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