Consider a bond paying a coupon rate of 10.50% per year semiannually when the ma

Question

Consider a bond paying a coupon rate of 10.50% per year semiannually when the market interest rate is only 4.2% per half-year. The bond has two years until maturity.

Find the bond's price today and four months from now after the next coupon is paid.

What is the total rate of return on the bond?

Consider a bond paying a coupon rate of 10.50% per year semiannually when the market interest rate is only 4.2% per half-year. The bond has two years until maturity.

Find the bond's price today and four months from now after the next coupon is paid.

What is the total rate of return on the bond?

Explanation / Answer

YTM => 4.2%

Coupon amount => (1000 * 10.50% )/2 => 52.5

Years => 4

Bonds price today => 52.5 * PVIAF (4.2%, 4) + 1000 * PVIF(4.2%, 4)

=> 190 + 848

=> $1038

Four month from noe

coupon payment => (1000*10.5%)*4/12 => 35

YTM => 4.2*2 => 8.4 for full year so for four months => 8.4%*4/12 => 2.8%

n => 1.8 years so, 5 years

Bonds price today => 35 * PVIAF (2.8%, 5) + 1000 * PVIF(2.8%, 5)

=> 35 * 4.61+ 1000 * 0.871

=> $1032.35

return => (52.5 + (1032.35 - 1038) ) /1038

=> 4.5%

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