Question

Suppose that a 25-year government bond has a maturity value of $1000 and a coupon rate of 4%, with coupons paid semiannually. Find the market price of the bond if the yield rate is 3% compounded semiannually. (Round your answer to the nearest cent.) Is this bond selling at a discount or at a premium? O discount premium

Answer 1

As Bond is Semiannual

Coupon Rate = 4%/2 = 2%

YTM = 3%/2 = 1.5%

Period = 25*2 = 50

Bond Price = Interest*PVIFA(1.5%,50) + Par Value*PVIF(1.5%,50)

= 20 * 34.9997 + 1000*0.4750

Bond Price = $1,174.99 or $1,175

Since, it is more than Maturity Value($1000) by $175, So Bond is at Premium.