Bond A is a 6 coupon bond and makes annual payments with 10

Bond A is a 6 % coupon bond and makes annual payments with 10 years to maturity. Bond B is a 6% coupon bond and makes annual payments with 20 years to maturity. Both bonds have a market required return of 10% and face value of 1,000.

Find bond A and bond B price with the interest rate of 12%. Write down the formula for each bond price

Solution

Bond price = Present value (PV) of annual coupon payments + PV of Face value

Annual coupon payment for both bonds = Face value x Annual Coupon rate = $1,000 x 6% = $60

When interest rate = 12%,

Price of Bond A = $60 x PVIFA(12%, 10) + $1,000 x PVIF(12%, 10) = $60 x 5.6502** + $1,000 x 0.3220**

= $339.01 + $322 = $661.01

Price of Bond B = $60 x PVIFA(12%, 20) + $1,000 x PVIF(12%, 20) = $60 x 7.4694** + $1,000 x 0.1037**

= $448.16 + $103.7 = $551.86