Question

Calculate the price of a 5.7 percent coupon bond with 22 years left to maturity and a market interest rate of 6.5 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond?

Answer 1

Answer:

Explanation:

Par value =1000

Coupon rate = 5.7

Semiannual coupon payment= Par value*coupon rate/ 2 =1000*0.057/2=$28.5

Par value or FV=1000

Semiannual coupon payment(PMT) = 28.5

Years to maturity=22*2=44 semiannual

Annual yield to maturity=6.5

Semiannual yield to maturity = 3.25

For calculation, the formula attached will be used:

Price=28.5*(1-1/(1+0.0325)^44/0.0325)+1000/(1+0.0325)^44 =

= 28.5* ((1-0.2448)/0.0325) + 1000/4.0847= (28.5*23.2364) + 244.81 = $907.05

So, the bond is trading at dsicount because the current price (907.05) is below the face value