Explore BrainMass

# Bond values and interest rates

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

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?

#### Solution Preview

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.

\$2.19