Question

Calculate the price of a 6.5 percent coupon bond with 17 years left to maturity and a market interest rate of 10.5 percent. (Assume interest rates are semiannual and par value is $1,000.) Is this a discount or premium bond?

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =17x2

Bond Price =∑ [(6.5*1000/200)/(1 + 10.5/200)^k]     +   1000/(1 + 10.5/200)^17x2

k=1

Bond Price = 685.93

discount bond as price is below par value