A coupon bond that pays interest of $100 annually has a par value of $1,000, matures

tipsy4lyf · May 8, 2012, 04:31 AM

Calculate
a. the value and
b. the duration
of a $1000 3-year bond if the interest rate is 4%, 5%, 7%, if the bond pays annual interest of 7.5% of the bond’s face value!

Curlyben · May 8, 2012, 04:37 AM

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tipsy4lyf · May 8, 2012, 04:40 AM

Quote:

Originally Posted by Curlyben

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My apologies, I'm not sure if this is the way i would have to work it out.

PV= 75/1,04+75/1,05ˇ2+1075/1,07ˇ3 not?

tipsy4lyf · May 8, 2012, 04:41 AM

Quote:

Originally Posted by tipsy4lyf

My apologies, I'm not sure if this is the way i would have to work it out.

PV= 75/1,04+75/1,05ˇ2+1075/1,07ˇ3 not?

I believe from the total i would get the value,

ArcSine · May 8, 2012, 03:07 PM

You got it, Tipsy; it's

$\frac{75}{1.04} + \frac{75}{1.05^2} + \frac{1,075}{1.07^3} = 1,017.66$

By the way, as a quick sniff test of the proposed answer, from the fact that since the bond is paying a coupon rate that's greater than any of the involved discount rates, it must be priced at a premium to par. By itself that doesn't prove our answer, but it at least tells us that the value of the bond must be greater than 1,000 rather than < 1,000.

A coupon bond that pays interest of $100 annually has a par value of $1,000, matures

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