Estimating Price of a Bond
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Consider the two bonds described below:
Bond A Bond B
Maturity Years 15 20
Coupon Rate 10 6
(Paid Semiannually)
Par Value 1,000 1,000
a. If both bonds had a required return of 8%, what would the bonds prices be? Show work
b. Describe what it means if a bond sells at a discount, a premium, and at its face amount (par value). Are these two bonds selling at a discount, premium or par?
c. If the required return on the two bonds rose to 10%, what would the bonds' prices be? Show work
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Solution Summary
Solution explains the formula and methodology to estimate price of coupon paying bond at given discount rates.
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Solution:
a. If both bonds had a required return of 8%, what would the bonds prices be? Show work
Bond A
C=coupon payments=(1000*10%)/2=$50
n=number of coupon payments=15*2=30
Maturity Value =M=$1000
Required rate of return (semi annual) =r=8%/2=4%
Price of bond =C/r*(1-1/(1+r)^n)+M/(1+r)^n
Price of bond A=50/4%*(1-1/(1+4%)^30)+1000/(1+4%)^30=$1172.92
Bond B
C=coupon payments=(1000*6%)/2=$30
n=number of coupon payments=20*2=40
Maturity ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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