Problem #2: A bond has a face value (and redemption value) of $504,000, and pays coupons...

Question

Question

Problem #2: A bond has a face value (and redemption value) of $504,000, and pays coupons annually. The effective annual yield

Answer 1

Answer #1

Let coupon rate be c
yield=3c
Coupon=Coupon rate*Face Value=504000c

Present value of redemption=504000/(1+3c)^n

Present value of coupon=504000c/3c*(1-1/(1+3c)^n)

Given,

Present value of redemption=3*Present value of coupon

Hence,
504000/(1+3c)^n=3*504000c/3c*(1-1/(1+3c)^n)

=>1/(1+3c)^n=(1-1/(1+3c)^n)

=>1/(1+3c)^n=1/2

=>(1+3c)^n=2

Hence,

Present value of redemption=504000/(1+3c)^n=504000/2=252000

Present value of coupon=1/3*Present value of redemption=1/3*252000=84000

Price of bond=Present value of coupon+Present value of redemption=252000+84000=336000

Answer 2

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