Question

16. A 10-year bond, $100 face value bond with a 8% coupon rate and semi-annual coupons has a yield maturity of 5%. The bond should be trading at a price of $.___ Round to the nearest cent.

17. XYZ company has just issued a 30-year bond with a coupon rate of %7.5 (annual coupon payments) and a face value of $1,00. If the yield to maturity is 11%, what is the price of the bond. Round to the nearest cent.

There is a 1% tolerance for errors. For example, if the correct answer is 1.00, then any number between 0.99 and 1.01 will be correct answers.

Answer 1

Bond Price Formula:

Where,
C = Periodic coupon payment,
P = Face value of bond,
r = Yield to maturity
n = Number of periods till maturity

16.Since it pays semi-annual coupons

C = ($100 *8%)/2 =  $4.00
r = 5% / 2 = 2.50% = 0.025
P = $100
n = 10 *2 = 20

Substituting the values, we get:

Therefore, the bond should be trading at the price of  $123.38.

.

17. Given:

C = $100 * 7.5% = $7.5
r = 11% = 0.11
n = 30 years
P = $100

Substituting the values. we get:

Price of bond is  $69.57