Question

Consider a bond paying a coupon rate of 8.25% per year semiannually when the market interest rate is only 3.3% per half-year. The bond has two years until maturity. Par Value is 1,000

a. Find the bond's price today and six months from now after the next coupon is paid. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Current Price = 1,030.45

Price after 6 months = 1,023.20

b. What is the total rate of return on the bond?

Answer 1

Bond Par Value = $1,000

Coupon Rate = 8.25% semi-annually

Market Interest Rate = 6.6%

Time to Maturity = 2 years,

a.

Calculating Present Value of Bond,

Using TVM Calculation,

PV = [FV = 1000, T = 4, PMT = 41.25, I = 0.033]

PV = $1,030.45

After 6 months,

Calculating Present Value of Bond,

Using TVM Calculation,

PV = [FV = 1000, T = 3, PMT = 41.25, I = 0.033]

PV = $1,023.20

b.

Total Return = (Final Value - Initial Value + Coupon)/Initial Value

Total Return = (1023.20 - 1030.45 + 41.25)/1030.45

Total Return = 3.30%