Of the 2 bonds, which is the better buy?
Given a bond with 20 year maturity that pays coupons 4 times per year, 8% interest rate & is selling to yield 6%. What is the current price per bond?
The other bond pays once per year, 20 year maturity, 8% coupon, selling to yield 6.2 percent. What is the current price of the bond?
Bonds are debt instruments, issued by governments, municipalities, or corporations. The bond issuer is the one who needs money. When they issue a bond, they take a loan (as multiples of the face amount of the bond), which they will pay back when the bond matures. In addition, they pay interest payments to the bondholder, which are most often calculated as a percentage of the face value of the bond. Note that the face value of a bond is always $1,000 (unless otherwise stated). The bondholder is the one who lends the money and gets the ...
This solution shows how to calculate the current price of 2 bonds, each with 20 years to maturity, using a financial calculator. The first bond pays quarterly interest payments, whereas the second pays interest annually. The solution also explains concisely the nature of a bond as a financial instrument.