Homework Answers
Answer a.
Face Value = $1,000
Annual Coupon Rate = 9.80%
Semiannual Coupon Rate = 4.90%
Semiannual Coupon = 4.90% * $1,000
Semiannual Coupon = $49
Time to Maturity = 20 years
Semiannual Period = 40
Annual Interest Rate = 12.00%
Semiannual Interest Rate = 6.00%
Bond Price = $49 * PVFA(6.00%, 40) + $1,000 * PVF(6.00%,
40)
Bond Price = $49 * 15.0463 + $1,000 * 0.0972
Bond Price = $834.47
Answer b.
Face Value = $1,000
Semiannual Coupon = $49
Semiannual Period = 40
Annual Interest Rate = 8.00%
Semiannual Interest Rate = 4.00%
Bond Price = $49 * PVFA(4.00%, 40) + $1,000 * PVF(4.00%,
40)
Bond Price = $49 * 19.7928 + $1,000 * 0.2083
Bond Price = $1,178.15
Answer c.
Higher the interest rate, lower the bond price.
Answer d.
Face Value = $1,000
Semiannual Coupon = $49
Semiannual Period = 40
Annual Interest Rate = 9.80%
Semiannual Interest Rate = 4.90%
Bond Price = $49 * PVFA(4.90%, 40) + $1,000 * PVF(4.90%,
40)
Bond Price = $49 * 17.3967 + $1,000 * 0.1476
Bond Price = $1,000.04
Answer e.
If the interest rate is higher than the coupon rate, then bond
is trading at discount.
If the interest rate is less than the coupon rate, then bond is
trading at premium.
If the interest rate is equal to the coupon rate, then bond is
trading at par.
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