Question

You decide you want to experiment a little with investing in bonds. Your grandma gives you $1,000 at graduation and you want to put it away in a safe place. You find a government bond to buy. The bond will mature in 5 years and pays a coupon once a year.
a.   (2 points) If the Annual Coupon Rate is 5%, what is your coupon payment?
    b.   (3 points) If you assume that the annual discount rate is 4% compounded annually, how much is the bond worth today?

Answer 1

Information provided:

Par value= future value= $1,000

Time= 5 years

Coupon rate= 5%

Discount rate= 4%

a.Coupon payment= coupon rate*par value of bond

                                    = 0.05*$1,000

                                    = $50

b.The worth of the bond is calculated by computing the present value.

Enter the below in a financial calculator c:

FV= 1,000

N= 5

PMT= 50

I/Y= 4

Press the CPT key and PV the present value.

The value obtained is 1,044.5182.

Therefore, the bond is worth $1,044.52 today.

In case of any query, kindly comment on the solution.