In 2016 Beth purchased a 10-year, 3.20% p.a. semi-annual paying coupon bond with a Face Value (FV) of $2 000 000, as she was attracted by the fixed income stream in order to fund her retirement expenses. b) Is Beth's coupon bond currently selling at a premium, par or discount? Describe the relationship between bond prices and interest rates.
In 2016 Beth purchased a 10-year, 3.20% p.a. semi-annual paying coupon bond with a Face Value (FV) of $2 000 000, as she was attracted by the fixed income stream in order to fund her retirement expenses.
b) Is Beth's coupon bond currently selling at a premium, par or discount? Describe the relationship between
We will calculate the price of the bond with present value formula in excel. Just simply type =PV in excel start this function.
Formula:
=PV(Rate,nper,pmt,fv)
Rate=3.20%/2 (we have divided rate by 2 as we are calculating semiannually)
Nper (number of years) =10*2 (we have multiplied years with 2 as we want value in months as we are calculating semi annally)
Pmt(Coupon payments) =3.20% of face value or future value
=3.20%*200000=6400
(We will also divide this coupon payment by 2 as we are calculating semiannually)
Note- We are not given coupon rate, so it is assumed that the coupon rate and rate of return is same.
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