Question

Suppose US government issues a treasury bond at Jan 15 2005 with a face value of $100, and

the bond matures at Jan 15 2015. The bond pays semi-annual coupons, with a coupon rate of

7.5%.

a. If the market interest rate at Jan 15 2005 is 8%. What is the bond price?

b. Now one year later, you are at Jan 15 2006. After two coupon payments, and the market

interest rate changes to 7%. If you want to sell this bond to another investor. What is the

price at Jan 15 2006?

Answer 1

a). To find the bond price, we need to put the following values in the financial calculator:

N = (2015 - 2005)*2 = 20;

I/Y = 8/2 = 4;

PMT = (7.5%/2)*100 = 3.75;

FV = 100

Press CPT, then PV, which gives us -96.60.

Hence, Price of Bond is $96.60

b). To find the bond price, we need to put the following values in the financial calculator:

N = (2015 - 2006)*2 = 18;

I/Y = 7/2 = 3.5;

PMT = (7.5%/2)*100 = 3.75;

FV = 100

Press CPT, then PV, which gives us -103.55.

Hence, Price of Bond is $103.55