Question

You are considering buying a 10-year 7% coupon rate bond with a face value of $1,000 that is priced to yield 12% and that makes semiannual coupon payments. The most recent coupon payment was 68 days ago. What is the price you will pay for this bond (assume that there are 180 days in each semiannual period)?

Answer 1

okay so what have you tried so far?

Answer 2

well i don't know where to even start to be honest. Finance is not my major i just need it for my degree :\

Answer 3

okay well lets start from the beginning shall we you tell me if you know what something is and if you dont i will explain okay

Answer 4

so anything will help :)

Answer 5

ok

Answer 6

first off do you know what a coupon rate bond is?

Answer 7

the interest rate

Answer 8

okay yes you got that right :)

Answer 9

do you know what semiannual coupon payments are?

Answer 10

no

Answer 11

A semiannual event happens twice a year, typically every six months. Semiannual is an adjective that can describe something that occurs, or is payable, reported or published twice each year, as in a semiannual periodical.

For example, most bonds pay interest semiannually until maturity, meaning bond holders will receive two interest payments each year.

Answer 12

does that make sense?

Answer 13

yes.

Answer 14

okay your doing great!

Answer 15

okay so now lets cut the question into pieces, so it says that you are considering buying a 10-year 7% coupon rate bond ( and you said that you already know what that is)

Answer 16

thanks. but i cant figure out the answer. lol

Answer 17

ok. the interest rate

Answer 18

okay so it says that the coupon payment was 68 days ago

Answer 19

and assume that there are 180 days in each semiannual period)

Answer 20

so if the face value of $1,000 is 12%

Answer 21

what price would you pay? - i layed it out for you

Answer 22

120?

Answer 23

yes you are correct but let me show you the steps with an example Step 1
Determine the interest payments by multiplying the interest rate per interest payment by the face value of the bond. In the example given, the interest rate per payment is 4 percent. This is half of the stated interest rate because the bond pays interest two times per year. Thus, 4 percent times $100,000 equals $4,000.
Step 2
Determine the present value of an annuity factor for the interest payments. Use the present value of an annuity table. In the example, the term is 10, because the maturity is five years and the bond pays interest semi-annually. The interest rate is 5 percent, which is half of the current market rate, because the interest pays semi-annually. Using these figures, the present value of an annuity factor is 7.7217.
Step 3
Multiply the interest payment by the present value of an annuity factor determined in Step 2. This is the present value of the interest payments. In the example, $4,000 times 7.7217 equals $30,886.80.
Step 4
Determine the present value of $1 factor. Use the present value of a $1 table. In the example, the term is 10, because the maturity is five years and the bond pays interest semi-annually. The interest rate is 5 percent, which is half of the current market rate because the interest pays semi-annually. Using these figures, the present value of an annuity factor is 0.6139.
Step 5
Multiply the face value of the bond by the present value of $1 factor determined in Step 4. In the example, $100,000 times 0.6139 equals $61,390.
Step 6
Add the present value of the interest payments, determined in Step 3, to the present value of the bond's face value, determined in Step 5. In the example, $30,886.80 plus $61,390 equals a bond market price of $92,276.80.

Answer 24

use these steps to help you in the future

Answer 25

so the answer for the question is 120?

Answer 26

or simply put lets say that the A U.S. Treasury bond has a calculated price of 102.1875. We would quoted the price in the market as:

x = .1875 x = 6

32 1

102.1875 = 102 6/32 = 102-06

Answer 27

well what do you think i want you to figure it out its better if you know that you are right in your mind without a doubt so then my say wouldnt mean anything, im just here to help ^.^

Answer 28

do you have multiple choice answers for it? this may make it esair for you

Answer 29

no

Answer 30

okay well use the formula that i gave you and you should be just ine, i need to help this grl with her science lol she wont stop bugging me

Answer 31

if you are still confused i recommend jim_thompson5910 he is really good at math he may beable to help you farther.

Answer 32

he is awesome !

Answer 33

Thanks a lot for your help I appreciate it. I'll Let you know if I have anymore questions.

Answer 34

mhm no prob vote me best answer! :P "if you want to " lol