Consider a bond paying a coupon rate of 8.75% per year semiannually when the mar

Question

Consider a bond paying a coupon rate of 8.75% per year semiannually when the market interest rate is only 3.5% per half-year. The bond has three years until maturity. a. Find the bonds price today and six months from now after the next coupon is paid. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Current price Price after six months b. What is the total rate of return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Total rate of return % per six months

Explanation / Answer

The bond pays every six months = 1000*8.75%*0.5 = $43.75

Current price:

Using financial calculator, Enter N = 6, PMT = 43.75, I/Yr = 3.5%, FV = 1000 and press the PV key = 1046.62

Price after 6 months ;

Using financial calculator, Enter N = 5, PMT = 43.75, I/Yr = 3.5%, FV = 1000 and press the PV key = 1039.50

b. Total rate of return = ($43.75 + ($1039.50 - $1046.62))/$1046.62

= $43.75-$7.12/$1046.62 = 3.50% per six months

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