Question

A bond has a par value of $1000 and a coupon rate of 9.5%. The bond matures in 7 years. What is the value of the bond if similar bonds yield 4%?

This bond makes semiannual payments. Can you show how to input it in a financial calculator.

Answer 1

The value of the bond is computed as shown below:

The coupon payment is computed as follows:

= 9.5% / 2 x $ 1,000 (Since the payments are semi annually, hence divided by 2)

= $ 47.50

The YTM will be as follows:

= 4% / 2 (Since the payments are semi annually, hence divided by 2)

= 2%

N will be as follows:

= 7 x 2 (Since the payments are semi annually, hence multiplied by 2)

= 14

So, the price of the bond using the financial calculator will be as follows:

Simply plug the below figures in the calculator

PMT = 47.50

N = 14

I/Y = 2

FV = 1,000

Finally press CPT and then press PV.

It will give PV equal to 1,332.92 Approximately

Feel free to ask in case of any query relating to this question