Question

Consider a bond paying a coupon rate of 11.00% per year semiannually when the market interest rate is only 4.4% per half-year. The bond has six years until maturity.

a.	Find the bond's price today and twelve months from now after the next coupon is paid. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Current price	$
Price after twelve months	$

b.	What is the total rate of return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Total rate of return

% per six months

We do not use excel in this class, only formulas and the Texas Instruments BA II Plus calculator. Please explain without using excel!

Answer 1

Given about a bond,

Face value = $1000

Coupon rate = 11% paid semiannually

So, semiannual coupon = (11%/2) of 1000 = $55

interest rate = 4.4% per half year

years to maturity = 6 years

a). Using financial calculator to solve for price, use following values:

FV = 1000

PMT = 55

N = 2*6 = 12

I/Y = 4.4

Compute for PV, we get PV = -1100.88

So, price of the bond today = $1100.88

After 12 months, change N = 10

Compute for PV, we get PV = -1087.47

Price after twelve months = $1087.47

b). total return per six month is same as the YTM of the bond

So, total rate of return = 4.4% per six months