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20 November, 21:03

Calculate the price of a 5.2 % coupon bond with 18 years left to maturity and a market interest rate of 4.6 %. (Assume interest payments are semiannual.)

Do not round intermediate calculations and round your final answer to 2 decimal places

Is this a discount or premium bond?

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Answers (1)
  1. 21 November, 00:50
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    Bond is selling at Premium

    Explanation:

    It is common for bond valuation if coupon rate is greater than market interest rate than bond is selling at premium.

    Suppose

    Bond = $1000

    Coupon rate = 5.2% / 2 = 2.6%

    Market interest rate = 4.6% / 2 = 2.3%

    No of year = 18 x 2 = 36 Years

    using PVIFA and PVIF table value coupon amount and bond we can get the value of current market price.

    Coupon is $1000 x 2.6% = $26

    Par Value of bond = $1000

    Using PVIFA & PVIF table at 2.3% we get the following figures.

    $ 26 x 24.3026 = $631.87

    $ 1000 x 0.4410 = $441.04

    Current market value of bond = $1072.91
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