Question

A $1,000 bond matures in 15 years and carries a 5 percent coupon. The bond is callable in 5 years at a premium equal to one year's interest payments. What is the correct formula for computing the current price given a market rate of 4.7 percent

Answer 1

The formula is

Price of the bond = [ $25 x ( 1 - ( 1 + 2.35% )^-30 )/ 2.35% ] + [ $1,000 / ( 1 + 2.35% )^30 ]

Step-by-step explanation:

To calculate the price of the bond, use the following formula

Price of the bond = [ Coupon payment x ( 1 - ( 1 + Semiannual market rate )^-numbers od periods )/ Semiannual market rate ] + [ Face value / ( 1 + Semiannual market rate )^numbers of periods ]

Where

Coupon payment = $1,000 x 5% x 6/12 = $25

Semiannual market rate = 4.7% x 6/12 = 2.35%

Numbers of periods = 15 years x 12/6 = 30

Face value = $1,000

Placing values in the formula

Price of the bond = [ $25 x ( 1 - ( 1 + 2.35% )^-30 )/ 2.35% ] + [ $1,000 / ( 1 + 2.35% )^30 ]