Compute the price of a 3.8 percent coupon bond with 18 years left to maturity and a market interest rate of 7 percent. Compute the price again if interest payments are paid semi-annually (solve using semi-annual compounding). Par value is $1000.

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02-09-2022
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Compute the price of a 3.8 percent coupon bond with 18 years left to maturity and a market interest rate of 7 percent. Compute the price again if interest payments are paid semi-annually (solve using semi-annual compounding). Par value is $1000.

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abdulmajeedabiodunac abdulmajeedabiodunac · Answer 1 · 2022-09-07T09:51:07-04:00

The bond price with annual interest payments is $678.11

The bond price with semiannual interest is $675.35

What is the price of a bond?

The price of a bond is the present value of its future cash flows, coupons and the face value receivable by the bondholders at maturity discounted at the market interest rate

The price of the bond, whose market interest rate is 7% and 3.8% coupon rate can be determined using a financial calculator such that the calculator mode is set to its mode before making necessary inputs:

Annual compounding:

N=18(number of annual coupons in 18 years)

PMT=38(annual coupon=3.8%*$1000)

I/Y=7(annual market interest rate)

FV=1000(face value)

CPT(press compute)

PV=$678.11

Semiannual compounding:

N=36(number of semiannual coupons in 18 years)

PMT=19(semiannual coupon=3.8%*$1000/2)

I/Y=3.5(semiannual market interest rate)

FV=1000(face value)

CPT(press compute)

PV=$675.35

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