Question

The function s(t) = 0.055 + 0.008t gives the effective annual rate of a zero coupon bond of maturity t, with t in years. Find the price of a 2 year coupon bond with semiannual coupons of 6% and a face/redemption value of $400,000.

Answer 1

Coupon = Face value * coupon rate
= $400,000 * 6%/2
= $12,000.

Price=12,000/(1+0.055+0.008*0.5)^0.5 + 12000/(1+0.055+0.008*1)^1 + 12000/(1+0.055+0.008*1.5)^1.5 + (400,000+12000)/(1+0.055+0.008*2)^2=$306,241.63

= 11,660.9321 + 11,288.8053 + 10,887.6617 + 359,185.0684

= $393,022.47