Question

at the beginning of the year, you bought a regular bond sith the folleing info: Coupon Rate: 8%, Face Value: 10,000, Interest Rate: 5.5%, Maturity: 35 years, Coupon payment is made at the end of each year. a) What should the fair value/price of the bond be when rounded to nearest two decimal places? b) if the market price for this bond is $7,343.43 and you chose to pay that price to have the bond and hold it until maturity, what is the yield to annual rate of return(yield) you should receive? Round to the nearest two decimal places.

Answer 1

Solution:

a) We will be using our BA II plus calculator TVM to calculate the price of the bond.

FV = 10000 , PMT = 8% of 10000 = 10000 * .08 = 800 , I/Y = 5.5 , N = 35

Then we press CPT + PV , to get PV as = 13847.63

So the price of the bond is 13847.63

b) Now , if the market price of the bond is 7343.43 i.e. we have PV = 7343.43

Again putting the values in the TVM row of our BA II plus

PV = -7343.43 , PMT = 800 , N =35 , FV = 10000 , I/Y = ?

We will press CPT + I/Y to the yield as 10.9999

The yield to be received should be 11% approx