# Calculations of bonds

| January 28, 2015

A coupon bond has a face value of \$1000 and pays interest at the rate of 10% per year with interest payments made semi-annually. The bond matures 5-years from today. Assume that an interest payment was just made.Note: The face value and interest rate are characteristics of the bond during its entire existence. In this problem the bond was issued some time in the past and may even have been sold/bought multiple times. But, the past Is the past and only what happens from now until the bond matures in 5 years is relevant. a. Today, the market interest rate for bonds with similar risk is 6% per year compounded semiannually. Determine today’s market price for the bond using today’s market interest rate to discount all future bond cash flows to maturity.b. But, the market interest rate can change – let’s say that today’s rate is 12% per year conpounded semi-annually. Determine today’s market price for the bond using the new 12% rate to discount all future bond cash flows to maturity. Answers Market price = \$1171 at 6% per year compounded semi-annually Market price = \$926 at 12% per year compounded semi-annually

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