Question

Bank of America has bonds that have a 6.5% coupon, payable annually, and mature in 5 years. If an investor has a required rate of return of 4.3% per annum, compounded annually, what is the price of the bond? What happens to the return if the investor pays more or less than the amount calculated? Show steps of how to solve using excel including the formulas and manually

Answer 1

F = Face value = $ 1,000 (assuming face value $ 1,000)

C = Coupon = 6.5%

Rate = Yield = 4.3%

Tenor or Term = N = 5

PV or Price of Bond = (C x F x ((1-((1+R)^-N)) / R) + (F/(1+R)^N)

Price of the bond = (65*((1-((1+4.3%)^-5))/4.3%)+(1000/(1+4.3%)^5))

Price of the bond = $ 1,097.12

If investor pays more than calculated price of the bond then it implies that required rate is lower than coupon of the bond and given return of 4.3%. Price of bond increase when the yield or current interest rate decreases.

If investor pays less than calculated price of the bond then it implies required rate is more than coupon of the bond and given return of 4.3%. Price of bond decreases when the yield or current interest rate increases.