You purchased a 1000 bond for 900 three years ago It is payi

You purchased a $1000 bond for $900 three years ago.   It is paying $30 in interest every 6 months.   It matures in 4 more years.  

a) What is its coupon interest rate?

b) What is its present value if current interest rates are 5% compounded semi-annually?  

Solution

Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and dividing by the bond\'s face value. For example, if a bond has a face value of $1,000 and a coupon rate of 5%, then it pays total coupons of $50 per year.

In this case total interest received per year = 60

coupon interest rate = 60/1000*100 = 6%

b) Present value: Fixed value {1+ (1+i)ⁿ}

1000(1+(1.05)⁸

1000+ 1477.455

2477.455