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Calculating the current price and return on bond

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Assumptions :
All payments occur at the end of the period unless stated otherwise.
Interest is compounded annually unless stated otherwise.
Face value of all bonds is $1000.

Starbucks has one debt issue outstanding. The debt matures on August 15, 2017, and has a 6.25% coupon. Coupons are paid semiannually. The bond is priced to yield 1.61% compound semiannually. The bond has a face value of $1000.

a. Estimate the price of the bond on February 15, 2013, immediately after that coupon is paid.

b. You buy the bond on February 15, 2013 for your estimated price from part a. You sell the bond 1 year later for $1160. What was your return? Why is it different from the original yield to maturity? Assume you collect 2 coupon payments.

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Solution Summary

Solution describes the steps to calculate the current price and return of the given investment. Calculations are carried out with the help of suitable built-in functions in MS Excel.

Solution Preview

Please refer attached file for better understanding of formulas in MS Excel.

a)
Position at February 15, 2013
Face Value of bond=FV=$1,000
Coupon Payment=PMT=1000*6.25%/2=$31.25 Per semi annual
Number of coupon Payments ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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