Question

1. Calculate the price of a bond with Face value of bond is $1,000 and:

a. Bond yield of 8.4%, coupon rate of 7% and time to maturity is 5 years. Coupon is paid semi-annually (Bond 1)

b. Bond yield of 7%, coupon rate of 8% and time to maturity is 4 years. Coupon is paid semi-annually

c. Calculate the price of Bond 1 right after the 5th coupon payment.

Answer 1

1a) N = 5 * 2 = 10

I/Y = 8.4/2 = 4.2

PMT = 1,000*0.07/2 = 35

FV = 1,000

CPT PV

PV = -943.7848185

The price of the bond = $943.7848185

b) N = 4*2 = 8

I/Y = 7/2 = 3.5

PMT = 1,000*0.08/2 = 40

FV = 1,000

CPT PV

PV = -1,034.369779
The price of the bond = $1,034.369779

c) Bond 1 has 10 payments in total.

The price of the bond after 5 payments is the PV of the remaining cash flows. Remaining cash flows contain 5 coupons and the principal amount

N = 5

I/Y = 4.2

PMT = 35

FV = 1,000

CPT PV

PV = -969.0115588

The price of the bond after the 5th coupon payment = $969.0115588

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