Consider a bond (with par value = $1,000) paying a coupon rate of 8% per year se

Question

Consider a bond (with par value = $1,000) paying a coupon rate of 8% per year semiannually when the market interest rate is only 3% per half-year. The bond has 3 years until maturity.

Find the bond's price today and 6 months from now after the next coupon is paid. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

What is the total (6-month) rate of return on the bond? (Omit the "%" sign in your response.)

Consider a bond (with par value = $1,000) paying a coupon rate of 8% per year semiannually when the market interest rate is only 3% per half-year. The bond has 3 years until maturity.

Explanation / Answer

a) Bond price (Using excel formula):

As on today = -PV(0.03,6,40,1000) = 1054.17

After 6 months =-PV(0.03,5,40,1000) = 1045.80

b) 6 months rate of return = (Coupon + P1 - P0) / P0

= (40 + 1045.80 - 1054.17) / 1054.17 = 3%

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