Question

Suppose you buy a bond on January 1st, 2014. The principal amount is 1500, the coupon rate is 10%, and the bond matures in exactly 3 years. If the prevailing interest rate is 20%, for how much can you sell the bond on January 1st 2016?

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =1

Bond Price =∑ [(10*1500/100)/(1 + 20/100)^k]     +   1500/(1 + 20/100)^1

k=1

Bond Price = 1375