Consider a bond paying a coupon rate of 10% per year semiannually when the market interest rate is only 4%. The bond has 3 years until maturity.

a. Find the bond price today and six months from now after the next coupon is paid, assuming the market rate will be constant during the following 6 months.

b. What is the total rate of return (holding period return) on the bond over the six month period?

Note: adjust the time to maturity, PMT and interest rate to semi-annual basis

Using a financial calculator, you can solve for bond price with the following inputs;

Maturity of bond (as of today); N = 3*2 = 6

Face value; FV = 1000

Semiannual coupon payment; PMT = (10%/2) * 1000 = 50

Semiannual interest rate; I/Y = 4%/2 = 2%

then CPT PV = $1,168.04

6-months from today, you will use the following inputs to find new price;

Maturity of bond (6-months later); N = 2.5 * 2 = 5

Face value; FV = 1000

Semiannual coupon payment; PMT = (10%/2) * 1000 = 50

Semiannual interest rate; I/Y = 4%/2 = 2%

then CPT PV = $1,141.40

Rate of return = [ (New price + income - old price) / Old price] * 100

= [ (1,141.40 + 50 - $1,168.04) / 1,168.04] * 100

= 0.01999*100

= 2.00%