Bond Market

1. Valuing Bonds, Microhard has issued a bond with the following characteristics:
Par : $1,000
Time to Maturity : 20 years
Coupon rate : 8 percent
Calculate the price of this bond if the yield to maturity is
a). 8 percent
b). 10 percent
c). 6 percent
Solution: (1)
a). 8 Percent
BP = (C/ytm) * [1-1/(1+ytm)M] + FV/(1+ytm)M]
As:
+ C(Coupon Payment) = Face Value/Par Value * Coupon Rate
= $1,000 * 8% = $80
+ ytm = 8%
+ M = 20 Years
+ FV = $1,000
Therefore, BP = ($80/8%) * [1-1/(1+8%) 20] + $1,000/(1+8%)20 = $1,000
b). 10 Percent
BP = (C/ytm) * [1-1/(1+ytm)M] + FV/(1+ytm)M]
As:
+ C(Coupon Payment) = Face Value/Par Value * Coupon Rate
= $1,000 * 8% = $80
+ ytm = 10%
+ M = 20 Years
+ FV = $1,000
Therefore, BP = ($80/10%) * [1-1/(1+10%)20] + $1,000/(1+10%)20 = $829.73
c). 6 Percent
BP = (C/ytm) * [1-1/(1+ytm)M] + FV/(1+ytm)M]
As:
+ C(Coupon Payment) = Face Value/Par Value * Coupon Rate
= $1,000 * 8% = $80
+ ytm = 6%
+ M = 20 Years
+ FV = $1,000
Therefore, BP = ($80/6%) * [1-1/(1+6%) 20] + $1,000/(1+6%)20 = $1,229.39

2. Find the price of an annual coupon bond given that the coupon rate = 8%, the face value =
$1000, the required return = 9%, and there are 22 years remaining until maturity.
Solution:
BP = (C/ytm) * [1-1/(1+ytm)M] + FV/(1+ytm)M]
As:
+ C(Coupon Payment) = Face Value/Par Value * Coupon Rate
= $1,000 * 8% = $80
 + ytm = 9%
+ M = 22Years
+ FV = $1,000
Therefore, BP = ($80/9%) * [1-1/(1+9%) 22] + $1,000/(1+9%)22 = $905.576

3. Find the price of an annual coupon bond given that the coupon rate = 4%, the face value =
$1000, the required return = 6%, and there are 25 years remaining until maturity.
Solution:
BP = (C/ytm) * [1-1/(1+ytm)M] + FV/(1+ytm)M]
As:
+ C(Coupon Payment) = Face Value/Par Value * Coupon Rate
= $1,000 * 4% = $40
+ ytm = 6%
+ M = 25Years
+ FV = $1,000
Therefore, BP = ($40/6%) * [1-1/(1+6%) 25] + $1,000/(1+6%)25 = $744.33

4. Find the price of an annual coupon bond given that the coupon rate = 5%, the face value =
$1000, the required return = 7%, and there are 11 years remaining until maturity.
Solution:
BP = (C/ytm) * [1-1/(1+ytm)M] + FV/(1+ytm)M]
As:
+ C(Coupon Payment) = Face Value/Par Value * Coupon Rate
= $1,000 * 5% = $50
+ ytm = 7%
+ M = 11Years
+ FV = $1,000
Therefore, BP = ($50/7%) * [1-1/(1+7%) 11] + $1,000/(1+7%)11 = $850.027

5. Find the price of a semiannual coupon bond given that the coupon rate = 9%, the face
value = $1000, the required return = 13%, and there are 5 years remaining until maturity.
Solution:
BP = (C/2)/(ytm/2) * [1-1/(1+ytm/2)2M] + FV/(1+ytm/2)2M]
As:
+ C(Coupon Payment) = Face Value/Par Value * Coupon Rate
= $1,000 * 9% = $90
+ ytm = 13%
+ M = 5Years
+ FV = $1,000
Therefore, BP = ($80/2)/(13%/2) * [1-1/(1+(13%/2)) 5*2] + $1,000/(1+(13%/2)5*2
= $820.279
6. Find the price of a semiannual coupon bond given that the coupon rate = 6%, the face
value = $1000, the required return = 6%, and there are 18 years remaining until maturity.
Solution:
BP = (C/2)/(ytm/2) * [1-1/(1+ytm/2)2M] + FV/(1+ytm/2)2M]
As:
+ C(Coupon Payment) = Face Value/Par Value * Coupon Rate
= $1,000 * 6% = $60
+ ytm = 6%
+ M = 18Years
+ FV = $1,000
Therefore, BP = ($60/2)/(6%/2) * [1-1/(1+(6%/2)) 18*2] + $1,000/(1+(6%/2)18*2
= $1,000

7. Find the price of a semiannual coupon bond given that the coupon rate = 7%, the face
value = $1000, the required return = 9%, and there are 5 years remaining until maturity.
Solution:
BP = (C/2)/(ytm/2) * [1-1/(1+ytm/2)2M] + FV/(1+ytm/2)2M]
As:
+ C(Coupon Payment) = Face Value/Par Value * Coupon Rate
= $1,000 * 7% = $70
+ ytm = 9%
+ M = 5Years
+ FV = $1,000
Therefore, BP = ($70/2)/(9%/2) * [1-1/(1+(9%/2)) 5*2] + $1,000/(1+(9%/2)5*2
= $920.873