Question

Calculate the price of a 5.5 percent coupon bond with 15 years left to maturity and a market interest rate of 10.0 percent. (Assume interest payments are semiannual.) 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 =15x2

Bond Price =∑ [(5.5*1000/200)/(1 + 10/200)^k]     +   1000/(1 + 10/200)^15x2

k=1

Bond Price = 654.12

Discount bond as price is less than par value