Corporate Bonds

Archive for October, 2006

Question: Corp Bond Effective rate of Int Question.?

Bond face amt 1000$
matures in 15 yrs
nom int rate - .09%

Answer: To calculate the Price of the bond, we’ll use the following symbols:
(pv1,i,n) = present value of $1 discounted at i%, n periods from the present
(pva,i,n) = present value of an annuity of $1 discounted at i%, for n periods

a) What is the price of the bond that will yield an effective int rate of 8%?
The price of the bond is $1,000(pv1, 8%,15)+ 9%($1,000)(pva, 8%, 15)
= $1,000(0.31524) + 9%($1,000)(8.55948)
= $315.24 + $770.35
= 1,085.59 (i.e. at a premium)

b) What is the price of the bond to yield an effective int rate of 10%
The price of the bond is $1,000(pv1,10%,15) + 9%($1,000)(pva,10%,15)
= $1,000(0.23939) + 9%($1,000)(7.60608)
= $239.39 + $684.55
= $923.94 (i.e. at a discount)

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