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Estimating the current price of given bond

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DEF has an outstanding debt issue. The debt maturity is May 10, 2018 with a 6.25% coupon, which is paid semiannually. The bond has a face value of $1000 and yield is 1.61% compounded semiannually.

1. Estimate the price of the bond on November 10, 2014 after the coupon is paid.

2. Company B purchases the bond on November 10, 2014 for the price above. The bond is sold in one year for $1160. Calculate the return. Why is it different from the original yield to maturity assuming that you collect two payments?

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Solution Summary

Solution depicts the methodology to find the price and return in the given case. Calculations are carried out with the help of suitable built-in functions in MS Excel.

Solution Preview

Please refer attached file for better understanding of formulas in MS Excel.

a)
Data as on November 10, 2014
Face Value of bond=FV=$1,000
Coupon Payment=PMT=1000*6.25%/2=$31.25 Per semi annual
Number of coupon Payments ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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