3) The City of Ames issued a new series of bonds on Jan 1, 2009. The bonds were

Question

3) The City of Ames issued a new series of bonds on Jan 1, 2009. The bonds were sold at par ($1,000), have a 3.5% annual coupon rate and mature in 10 years, on Jan 1, 2019. Coupon interest payments are made semi-annually (on June 30 and December 31).

(A) What was the Semi-Annual Current Yield of this bond on January 1, 2012 assuming that you just paid $1,088.00 for it? _________________

(B) Assuming that the market interest rate had risen to 4.5%, what should be the price of the bond on January 1, 2011 (16 coupon payments left)? _________________

(C) On July 1, 2012, you purchased the bond for $850 (you purchased it just after the coupon payment was paid for June). What was the semi-annual Yield to Maturity (YTM) at that date (13 coupon payments left)? _________________

Explanation / Answer

Answer:

1. The current semi annual current yiled on the bond = 1.29%

using the formula rate(20,1000*3.5%/2,-1080,1000)

2. using the present value formula

PV(4.5%/2,16,1000*3.5%/2,1000)

Value of bond is 933.44

3. The semi annual yield to maturity is 3.18% using the formuls RATE(13,1000*3.5%/2,-850,1000) in excel

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