Suppose a ten-year, $1,000 bond with an 8.1% coupon rate and semi annual coupons is trading for...

Question:

Suppose a ten-year, $1,000 bond with an 8.1% coupon rate and semi annual coupons is trading for $1,034.32.

a. What is the bond's yield to maturity (expressed as an APR with semi annual compounding) ?

b. If the bond's yield to maturity changes to 9.5% APR, what will be the bond's price?

YTM on Semiannual Coupon Bonds:

Most bonds offer semiannual coupon payments. The yield to maturity (YTM) on such bonds is the annualized yield. When annualizing the yield, the convention is to convert the semiannual yield to an effective annual rate.

Answer and Explanation:

a.

Let

  • P be the bond price,
  • r be the semiannual interest rate,
  • n be the number of periods of the bond = 10 * 2 = 20.
  • Coupon = semiannual coupon =...

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How to Price Bonds: Formula & Calculation

from Finance 104: Financial Management

Chapter 2 / Lesson 5
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