# Bond values and interest rates

Suppose that 5-year government bonds are selling on a yield of 4 percent. Value a 5-year bond with a 6 percent coupon. Start by assuming that the bond is issued by a continental European government and makes annual coupon payments. Then rework your answer assuming that the bond is issued by the U.S. Treasury, so that the bond pays semiannual coupons and the yield refers to a semiannually compounded rate.

How would the bond value in each case change if interest rates fall to 3 percent?

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Suppose that 5-year government bonds are selling on a yield of 4 percent. Value a 5-year bond with a 6 percent coupon. Start by assuming that the bond is issued by a continental European government and makes annual coupon payments. Then rework your answer assuming that the bond is issued by the U.S. Treasury, so that the bond pays semiannual coupons and the yield refers to a semiannually compounded rate.

Calculating Price of bond

To calculate the price of the bond we need to calculate / read from tables the values of

PVIF= Present Value Interest Factor

PVIFA= Present Value Interest Factor for an Annuity

Price of bond= PVIF * Redemption value + PVIFA * interest payment per period

PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%

PVIF( n, r%)= =1/(1+r%)^n

Yield= 4%

1) Annual Coupon Payments

Data

No of years to maturity= 5

Coupon rate= 6.00%

Face value= $1,000

Frequency = A Annual Coupon payments

Discount rate annually= 4.00% (Yield to maturity)

Redemption value = Face ...

#### Solution Summary

Calculates bond values for annual and semi annual compounding for different interest rates.