Answered step by step
Verified Expert Solution
Question
1 Approved Answer
The price of a risk-free coupon bearing bond is simply the NPV of its future generated cashflow stream. But given the consistent periodic coupon payments,
The price of a risk-free coupon bearing bond is simply the NPV of its future generated cashflow stream. But given the consistent periodic coupon payments, we can treat the coupons as an annuity and simplify the NPV formula: -mT B=f(3) - (14 (1+)7 + F(1 + r)-T Where B is the bond price, F is the face amount, m is the coupon payment frequency, T is the maturity, and interest rate r. Apply this formula to calculate the price of a bond with $1000 face value, maturing in 30 years, paying a semi-annual coupon of 4.5%, assuming a constant risk-free interest rate of 2%. Answer the following questions: Is this a premium or a discount bond? What might cause this bond to trade at a market price that is different from this calculated price
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started