A 6-year bond, 8% semiannual coupon bond sells at par ($1,000). Another bond of equal risk, maturity, and par value pays an 8% annual coupon. What is the price of the annual coupon bond?

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Business

Lyric Jenkins

8 November, 03:11

A 6-year bond, 8% semiannual coupon bond sells at par ($1,000). Another bond of equal risk, maturity, and par value pays an 8% annual coupon. What is the price of the annual coupon bond?

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Ignacio Arellano · Answer 1

The bond has 8% coupon paid semiannually, and those bonds sell at their par value. Since the bond sales at par value, Market rate (Yield) = Coupon rate = 8%

Second bond:

Coupon rate = 8% Par value = $1,000 Semiannual coupon amount = 1000 x 8%/2 = $40 Time to maturity = 6 years = 12 semiannual periods Semiannual Yield = 8%/2 = 4%

To get price of this bond we will use PV function of excel:

= PV (rate, nper, pmt, fv, type)

= PV (4%, 12, - 40, - 1000, 0)

= $1053.32

Price of this bond = $1,053.3