A coupon bond with a par value of $1,000 and a 10-year maturity pays semiannual coupons...
A coupon bond with a par value of $1,000 and a 10-year maturity pays semiannual coupons of $21.
(a) Suppose the yield for this bond is 4% per year compounded semiannually. What is the price of the bond?
(b) Is the bond selling above or below par value? Why?
Homework Answers
(a) Rate semi annual = 4%/2 = 2%
Price of bond = semi annual payment * PVAF(2%, 20 periods) + Face value * PVF(2%, 20 periods)
Price = $21 * 16.35143 + $1000 * 0.672971 = $1016.35
(b) It is selling above par because the current yield (2%) is below the coupon rate (2.1%). The current yield is based on the price while the coupon rate is based on par.
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