6-1

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights

 Bond Value

• Bond Value = PV(coupons) + PV(par)

• Bond Value = PV(annuity) + PV(lump sum)

Remember:
– As interest rates increase present values
decrease ( r → PV  )
– As interest rates increase, bond prices
decrease and vice versa

6-2
Relationship Between Coupon and Yield

• Coupon rate = YTM  Price = Par

• Coupon rate < YTM  Price < Par

–“Discount bond”

• Coupon rate > YTM  Price > Par

–“Premium bond”
6-3
 Semi annual Annual
t n*2 n
r MIR/2 MIR
Fv Fv Fv
C C/2 C

2-4
1. What is the principal amount of a bond that is repaid
at the end of the loan term called?

A. Coupon
B. Market price
C. Accrued price
D. Dirty price
E. Face value

E. Face value

2-5
2. On which one of the following dates is the principal
amount of a bond repaid?

A. Coupon date
B. Issue date
C. Discount date
D. Maturity date
E. Face date

D. Maturity date

2-6
Quick Review

2-7
1. A bond has a $1,000 face value, a market price of
$1,036, and pays interest payments of $70 every
year. What is the coupon rate?
A. 6.76 percent
B. 7.00 percent
C. 7.12 percent
D. 13.51 percent
E. 14.00 percent

Coupon rate = $70/$1,000 = 7 percent

2-8
2. A 6 percent bond has a yield to maturity of 6.5
percent. The bond matures in 7 years, has a face value
of $1,000, and pays semiannual interest payments.
What is the amount of each coupon payment?
A. $30.00
B. $32.50
C. $60.00
D. $62.50
E. $65.00

Coupon payment = ($1,000  0.06)/2 = $30

2-9
3. A $1,000 face value bond currently has a yield to
maturity of 6.69 percent. The bond matures in 3 years
and pays interest annually. The coupon rate is 7 percent.
What is the current price of this bond?
A. $948.01
B. $949.60
C. $1,005.26
D. $1,008.18
E. $1,010.13
C C C  FV
PV of bond    ....
(1  r ) (1  r )
1 2
(1  r )t
70 70 1,070
  
1.0669 1.0669 1.06693
2

 65.61  61.50  881.07

 $1,008.18 2-10
4. A bond with a $1,000 Face value has an 8 percent
annual coupon rate. It will mature in 4 years, and
annual coupon payments are made at the end of
each year. Present annual yields on similar bonds
are 6 percent. What should be the current price?
a. $1,069.30
b. $1,000.00
c. $9712
d. $927.66
e. none of the above
C C C  FV
PV of bond    ....
(1  r ) (1  r )
1 2
(1  r )t
80 80 80 1,080
   
1.06 1.06 1.06 1.06 4
2 3

 75.47  71.20  67.17  855.46

2-11
 1,069.30
5. A bond with a ten percent coupon rate bond pays
interest semi-annually. Face value is $1,000. The
bond has three years to maturity. The investors'
required rate of return is 12 percent. What is the
present value of the bond?
a. $1,020.86
b. $1,000
c. $980.97
d. $950.83
e. none of the above

C/2 C/2 C / 2  FV
PV of bond    ....
(1  r / 2)1 (1  r / 2) 2 (1  r / 2) 2*t
50 50 50 50 50 1,050
     
1.061 1.06 2 1.063 1.06 4 1.065 1.066
 47.17  44.50  41.98  39.60  37.36  740.21
 950.83 2-12
6. A zero coupon bond with a $1,000 face value. It
will mature in 5 years, Present annual yields on
similar bonds are 10 percent. What should be the
current price?

C C C  FV
PV of bond    ....
(1  r ) (1  r )
1 2
(1  r )t
FV
PB 
(1  r )t
1,000

(1  0.1) 5
 620.92

2-13
Chapter 6

END