Question

A bond with a face value of $1,800 pays half-yearly interest at a rate of 6% pa compounded half-yearly and has 7 years until maturity. The next interest payment is due in exactly one half-year. Calculate the price (P) required to yield 4% pa compounded half-yearly. Give your answer in dollars and cents to the nearest cent. P = $

Answer 1

Face value = $1800, Coupon rate = 6% p.a compounded half yearly , No of years to maturity = 7

Yield to maturity = 4% p.a compounded half yearly

Semi annual coupon = (Coupon rate x Face value) / 2 = (6% x 1800) / 2 = 108/2 = 54

Semi annual yield to maturity = yield to maturity / 2 = 4% / 2 = 2%

No of half years to maturity = 2 x no of years to maturity = 2 x 7 = 14

To find the price of the bond we will use pv function in excel

Formula to be used in excel: =pv(rate,nper,-pmt,-fv)

Using pv function in excel we get price of bond = 2017.9124 = 2017.91 (rounded to two places off decimal)

Price of bond = $2017.91