: Consider a 10-year bond that pays a 5 percent coupon semi-annually with a face
ID: 2644009 • Letter: #
Question
: Consider a 10-year bond that pays a 5 percent coupon semi-annually with a face value of $1000.
What is the price of this bond if the annualized yield to maturity of 4 percent (i.e., the stated rate is .04 compounded semi-annually)?
What is the price of this bond if the annualized yield to maturity of 5 percent (i.e., the stated rate is .05 compounded semi-annually)?
What is the price of this bond if the annualized yield to maturity of 6 percent (i.e., the stated rate is .06 compounded semi-annually)?
What is the price of this bond if the annualized effective rate is 5 percent?
Consider the bond described in Problem 2 above but let the coupon be paid annually. Answer questions a through c in Problem 2 above for this annual coupon paying bond.
Explanation / Answer
Bond price = Cashflow*((1+i)^n-1)/i+Maturity value/(1+i)^n
Putting all the values in the equation when interest rate is 4%, the cash flow would be 20 that is 2% semiannualy.
= 20*25.7+1000/1.49 = 1,158.92
Putting all the values in the equation when interest rate is 5%, the cash flow would be 25 that is 2.5% semiannualy.
= 25*25.54+1000/1.64 = 1,248.89
Putting all the values in the equation when interest rate is 6%, the cash flow would be 30 that is 3% semiannualy.
= 30*26.87+1000/1.81 = 1,359.79
price of this bond if the annualized effective rate is 5 percent
Putting all the values in the equation when interest rate is 5%, the cash flow would be 50 that is 5% annualy
= 50*12.58+1000/1.63 = 1,242.81
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