Question

On 30 May 2007, the terms of BCD bond were: Face value, F, is $200 000; nominal interest rate, j, is 10 per cent per annum payable on 30 May and 30 November each year; effective interest rate is 5.52%; redemption price, C, is $200 000; and maturity is on 30 May 2010. Determine the price of the bond on 30 May 2007.

Answer 1

Price of the bond=Present Value of the bond's future cash flows=

PV of all its future coupons+Pv of Face value to be received at redemption

ie.(Pmt.*(1-(1+j)^-n)/j)+(F/(1+j)^n)

where,

Pmt.=semi-annual coupon payment on the bond=(200000*10%/2)= $ 10000

j=semi-annual effective interest (Yield) rate =5.52% /2.76%

n=no.of semi-annual coupon payments still pending to maturity/redemption, ie.3 yrs.*2=6 semi-annual coupon periods

F=Face value of the bond= $ 200000

Substituting the above values in the formula,

(10000*(1-(1+0.0276)^-6)/0.0276)+(200000/(1+0.0276)^6)=

224463

ANSWER: Price of the BCD bond on 30th May 2007=

224463