Homework Sourse6pts Problem 2 Consider a 10year bond that pays a 5 percent
6pts) Problem 2: Consider a 10-year bond that pays a 5 percent coupon semi-annually with a face value of $1000. a. What is the price of this bond if the annualized yield to maturity of 5 percent (i.e., the stated rate is .05 compounded semi-annually)? b. What is the price of this bond if the annualized effective rate is 5 percent?
Solution
a)
b)
| 1 | Face value (FV) | $ 1,000 |
| 2 | Coupon rate | 5.00% |
| 3 | Number of compounding periods per year | 2 |
| 4 = 1*2/3 | Interest per period (PMT) | $ 25.00 |
| 5 | Number of years to maturity | 10 |
| 6 = 3*5 | Number of compounding periods till maturity (NPER) | 20 |
| 7 | Market rate of return/Required rate of return | 5.00% |
| 8 = 7/3 | Market rate of return/Required rate of return per period (RATE) | 2.50% |
| Bond price | PV(RATE,NPER,PMT,FV)*-1 | |
| Bond price | $ 1,000.00 |
