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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 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 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.

    $2.19

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