Solving a Bond Payment Problem

[kerrwilk]

Homework Statement

A $500, 8% bond is purchased on Feb 1, 2004 to yield 10% compounded semiannually. The interest on the bond is payable on Feb 1 and Aug 1 each year. Find the purchase price if the bond is redeemable at face value on Feb 1, 2014.

Homework Equations

The Attempt at a Solution

The fact that there are two % figures given has thrown me off this problem completely. Can anyone help?

 

[Ronnin]

The wording of the problem is a little confusing but I would venture to guess that the 8% is the coupon rate, and the 10% is the YTM. PMT in your financial program would be (Coupon Rate X Face Value)/2 since it is semi. The I value would be 10%. This should get you started.

 

[kerrwilk]

Ronnin,

Thanks so much for the help - this clarification of the wording fits with the formula in my text.

One thing my text doesn't discuss in depth is finding "n" (number of payments) when the bond's purchase and maturity dates both occur on interest payment dates...

Because this bond is purchased on Feb 1, 2004 and redeemable on Feb 1, 2014, am I correct in assuming that "n" is 19?

 

[Ronnin]

No, I would assume all 20 for N. The bond issuer still has an interest liability on that date. Let's say you purchase a bond right before the day the coupon payment is due, that almost 6 months worth of coupon payment would be baked into the price you would have to pay for the bond. Whoever is selling the bond is not going to give up any accrued interest and will expect that on top of the selling price.