Question

a) A level-coupon bond carries a coupon rate of 6 percent, payable semiannually, has 10 years until maturity, and the yield to maturity is 8 percent. (i) What interest payments do bondholders receive each year? (ii) At what price does the bond sell? (iii) What will happen to the bond price if the yield to maturity falls to 5 percent?

b) The British government’s outstanding perpetual bonds have annual coupon payments of $25, payable annually. The market interest rate today is 3.5 percent, at what price are you willing to buy these consols?

c) A pure discount bond has 10 years until maturity and will pay $1,000 at maturity. If the YTM is 8.5%, what is the current price of this pure discount bond?

Answer 1

a

i)

Interest payment = par value*coupon rate = 1000*0.06 =60

II)

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

Bond Price =∑ [(6*1000/200)/(1 + 8/200)^k]     +   1000/(1 + 8/200)^10x2

k=1

Bond Price = 864.1

III)

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

Bond Price =∑ [(6*1000/200)/(1 + 5/200)^k]     +   1000/(1 + 5/200)^10x2

k=1

Bond Price = 1077.95

Please ask remaining parts seperately, questions are unrelated