Assume interest rates for bonds today is 5% for an AAA rated bond. Calculate the price of the bond you have selected relative to the 5%. Is the bond selling at a premium or a discount
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Solution:
Current bond can be evaluated by present value of coupon payment annuity and present value of bond's face value.
Current Price of the Bond Annual Coupon Payment*[1-{1/(1r)n}]/r Par Value/(1r)n
Where r - Interest Rate
n - Maturity Period
Annual Coupon Payment Coupon Rate*Par Value
Bond Taken:
TENNESSEE VALLEY AUTH (AAA Bond)
Coupon Rate %
Interest Rate 5%
Time Period 45 years 9/12 years as it matures on 15-Sep-2060.
YearsFace Value 100
Annual Coupon Payment %*100
According to bond price formula:
Current Bond Price *[1-{1/(15%)}]/5% 100/(15%)
Current bond price is less than the face value of bond. Therefore, bond is selling at discount.
Factors that affect the bond...
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Published On:
12/17/2014
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