A bond pays quarterly coupons under an annual coupon rate of 5% and yield to maturity of 8% APR. With a face value of $1,000 and maturity of 10 years. What will be its price at the end of its 2nd year (after 8 coupon payments) assuming the same discount rate? Round your answer to dollar.

Question

Cheyanne Salazar

Business

21 July, 02:31

A bond pays quarterly coupons under an annual coupon rate of 5% and yield to maturity of 8% APR. With a face value of $1,000 and maturity of 10 years. What will be its price at the end of its 2nd year (after 8 coupon payments) assuming the same discount rate? Round your answer to dollar.

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Nathaniel Gibbs · Answer 1

Price of the bond at the end of 2 years is $823.99

Explanation:

Since the coupons are paid, quarterly, adjust the interest rate, coupon payment and total duration to quarterly. Also, note that there are 4 quarters in a year.

Two years later, the time to maturity would be; N = 8*4 = 32 quarters

Quarterly interest rate in this case; I/Y = 8%/4 = 2%

Face value of the bond; FV = $1,000

Quarterly Coupon Payment (PMT) = coupon rate * Face Value

PMT = (5%/4) * 1,000 = $12.5

After keying in the above inputs, CPT PV = 823.987

Therefore, to the nearest dollar, the Price of the bond at the end of 2 years is $823.99