(a) The price of a bond today and six months from now after the next coupon is paid and (b) to find the total rate of return on the bond that is paying a coupon rate of 10% per year semiannually when the market interest rate is only 4% per half-year. Introduction: A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond. Yield to maturity is defined as the discount rate that makes the present payments from the bond equal to its price. In simple terms, it is the average rate of return a holder can expect from that bond.

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Chapter 14, Problem 14PS

Summary Introduction

To determine:

(a) The price of a bond today and six months from now after the next coupon is paid and (b) to find the total rate of return on the bond that is paying a coupon rate of 10% per year semiannually when the market interest rate is only 4% per half-year.

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time.

The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond.

Yield to maturity is defined as the discount rate that makes the present payments from the bond equal to its price. In simple terms, it is the average rate of return a holder can expect from that bond.

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