Examples.

Calculate the value of

a) an annual 4% coupon paying bond and
b) a semiannual 8% coupon paying bond.

Both have five years to maturity and a market discount rate of 6%:

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Examples. Calculate the value of a) an annual 4% coupon
paying bond and b) a semiannual 8% coupon paying bond.
Both have five years to maturity and a market discount rate of 6%:
a)

The bond price is 91.575 per 100 of par value.

b)
The bond price is 108.530 per 100 of par value.

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Example. Suppose that a four-year, 5% annual coupon
paying bond is priced at 105 per 100 of par value. The yield-
to-maturity is the solution for the rate, r, in this equation:

where r = 0.03634, or 3.634%.

The bond is traded at a premium because its coupon rate

is greater than the yield required by investors.

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EXAMPLE 1
• Suppose that the one-year spot rate is 2%, the two-year spot rate is 3%, and
the three-year spot rate is 4%. Calculate the price of a three-year 5% annual
coupon paying bond:

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Example. Suppose that the one-year spot rate is 2%, the two-
year spot rate is 3%, and the three-year spot rate is 4%.
Calculate the price of a three-year 5% annual coupon paying
bond:

The bond price is 102.960.

• The present values of the individual cash flows discounted

using spot rates differ from those using yield-to-maturity, but
the sum of the present values is the same. Thus, the same
price is obtained using either approach.
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EXAMPLE 2
An investor wants to buy a 3-year 4% annual
coupon paying bond. The expected spot rates are
2.5%, 3%, and 3.5% for the 1st, 2nd, and 3rd year,
respectively. The bond’s yield-to-maturity
is closest to:
A. 3.47%
B. 2.55%
C. 4.45%

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EXAMPLE 3
A 3-year option-free bond (par value of $1,000) has an annual coupon of 9%. An
investor determines that the spot rate of year 1 is 6%, the year 2 spot rate is
12%, and the year 3 spot rate is 13%. Using the arbitrage-free valuation
approach, the bond price is closest to:

A) $1,080.
B) $912.
C) $968.

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EXAMPLE 3
•  N= 1; I/Y = 6.0; PMT = 0; FV = 90; CPT → PV = 84.91
N = 2; I/Y = 12.0; PMT = 0; FV = 90; CPT → PV = 71.75
N = 3; I/Y = 13.0; PMT = 0; FV = 1,090; CPT → PV = 755.42
• Price = 84.91 + 71.75 + 755.42 = $912.08.

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Example. A 6% German corporate bond is priced for
settlement on 18 June 2015. The bond makes semiannual
coupon payments on 19 March and 19 September of each
year and matures on 19 September 2026. Using the 30/360
day-count convention, calculate the full price, the accrued
interest, and the flat price per EUR100 of par value if the
YTM is 5.80% (2.90% per six months):

• The value of the bond after the latest coupon (19 March) is

The present value of the bond is EUR101.6616.

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Example (continued):

• The full price on 18 June 2015 is

• The accrued interest is

• The clean/flat price is

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EXAMPLE 1
• Bond G, described in the exhibit below, is sold for
settlement on 16 June 2020.
- Annual Coupon 5%
- Coupon Payment Frequency Semiannual
- Interest Payment Dates 10 April and 10 October
- Maturity Date 10 October 2022
- Day Count Convention 30/360
- Annual Yield-to-Maturity 4%

• Calculate full price, Accrued interest and Clean Price

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