, Recall the 5.5% Proctor and Gamble bond maturing on 2/1/2034. Suppose we are o
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Question
, Recall the 5.5% Proctor and Gamble bond maturing on 2/1/2034. Suppose we are on Aug 1, 2010, and the discount rate is 4.93%. Suppose the bond has just paid the coupon on that day (so the coupon that day is not included in the bond's future cash flows) . What is the current bond price? Quoted as percentage of par value, so set face value 100. 6-month effective rate: 0.0493/2 .02465. Coupons: $2.75 (.055/2 x 100) every 6 months, Annuity with 47 payments of $2.75. PV=76.04 Principal repayment: $100 in 47 periods. PV 31.84. -PV of bond: 76.04 + 31.84 = 107.88.Explanation / Answer
Coupons=5.5%*100/2=2.75
As 23.5 years remaining to maturity, so 47 coupon payments will be recieved
Price=2.75/(1+4.93%/2)+2.75/(1+4.93%/2)^2............2.75/(1+4.93%/2)^47+100/(1+4.93%/2)^47
=2.75/(4.93%/2)*(1-1/(1+4.93%/2)^47)+100/(1+4.93%/2)^47
=107.88
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