Bond price

Problem

A company sells $1,000 bonds which will pay semiannual coupons of $20 and will mature in 5 years.

What is the price if your required yield is 10% compounded semiannually?

Solution

Set up the following cash flow or open the "Bond - Coupons" example in the Help examples folder.

Comment	Type	Occurs	Date	Amount	Occurrences	Change	Step
Settlement	unknown	once	1-1-2004	1
Coupons	inflow	semiannually	1-7-2004	20	10	(no change)
Maturity	inflow	once	1-1-2009	1,000

Enter 10 into the rate field and select semiannual compounding. Make sure that Auto update is checked.

You'll find the anwser in the multiplication value field: -768.35.

Please note that this is a negative amount, since we entered payments as inflows. You could just as well have entered them as outflows, but then no IRR would have been calculated.

Also note that the IRR result displays a rate of 9.9999 %. This is due to the fact that the multiplication value is rounded to 0.01, setting the rounding for amounts to 0.00001, will result in a 10 % IRR.

What if the bond is a zero coupon bond?

Set up the following cash flow or open the "Bond - Zeros" example in the Help examples folder.

Comment	Type	Occurs	Date	Amount	Occurrences	Change	Step
Settlement	unknown	once	1-1-2004	1
Maturity	inflow	once	1-1-2009	1,000

For a 10% rate compounded semiannually, the multiplication value indicates the price for this bond: -613.91.