Question

Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period. Face value for bonds is $1000.

1. Hawk Inc. originally issued 10-year bonds with a face value of $1000 at par. The bonds have a coupon rate of 8%, and coupons are paid semiannually. The bonds will mature in 6 years, and the yield to maturity is 6.4% with semiannual compounding. Find the bond’s price today. If the yield rises, what do you expect will happen to the bond price?

Answer 1

price of coupon = Coupon payment per period * [1-(1+i)^-n]/i + par value/(1+i)^n

i = interest rate per period

n = number of periods

=>

price = 80/2 * [1-(1+0.064/2)^-12]/(0.064/2) + 1000/(1+0.064/2)^12

= 1078.69

If yield increases, bond price decreases