Question

Two years ago bonds were issued which currently still have 10 years until maturity. When issued the bonds were selling at par, and had a 4% coupon (paid annually). If interest rates for that grade of bond are currently 4.25%, what will be the market price of these bonds? Calculate to 2 decimals.

(Don't forget US bonds typically have a face value of $1,000).

In the USA coupon payments are typically made twice a year.

calculate the price of these bonds if coupon payments are made twice a year.

Answer 1

When issued the bonds wer selling at par hence ytm would be equal to coupon rate that is 4% that time

Current Price=(4%*1000)/(4.25%)*(1-(1/1.0425)^10)+1000/1.0425^10=979.9728

If coupons are paid semi-annually:

Current Price=(4%*1000/2)/(4.25%/2)*(1-(1/(1+4.25%/2))^20)+1000/(1+4.25%/2)^20=979.8051