Bond Pricing

Tutorial 2

FINA1141

170223
Bond Pricing

Price = Coupon X + Par value X

Tip: use the formula highlighted when doing the calculations

= coupon X Annuity factors + Par value X PV factor

Bond Pricing - Question
We have a 8% coupon, 30 year maturity bond
with a par value of $1000 paying 60 semi-
annual coupon payments of $40 each. Suppose
that the interest rate is 8% annually. Or r = 4%
per six month period.

What is the bond price today?

Bond Pricing – working question
Step 1: put the values into the formula

• Price = Coupon X + Par value X

• Price = $40 X + $1000 X

Bond Pricing – working question
• Step 2: split the formula into 2 and work out each part
separately
• Complete the 1st part of the formula (highlighted) and then
2nd part just leave with the values

• Price = $40 X + $1000 X

• In order to do this correctly you need to work put each part

step by step and use brackets on the calculator (you need a
scientific calculator for this)
Bond Pricing – working question

• Step 3: work out the bottom of the fraction in the square

brackets (in pink)

• Price = $40 X + $1000 X

• In the calculator input: (use brackets)

• Price = $40 X + $1000 X

Bond Pricing – working question

• Step 4: work out the fraction (in pink)

• Price = $40 X + $1000 X

• Price = $40 X + $1000 X

Bond Pricing – working question

• Step 5: work out everything inside the square bracket (in

pink)

• Price = $40 X + $1000 X

• Price = $40 X + $1000 X

Bond Pricing – working question

• Step 6: work out the fraction outside the square bracket (in
pink)

• Price = $40 X + $1000 X

• Price = $40 X 25 + $1000 X

Bond Pricing – working question

• Step 7: work out the calculations outside the square bracket

(in pink)

• Price = $40 X 25 + $1000 X

• Price = 1 + $1000 X
Bond Pricing – working question

• Step 8: do the multiplication calculation outside the square

bracket (in pink)

• Price = 1 + $1000 X

• Price = 904.939599 + $1000 X

• Now move into the 2nd part of the formula

Bond Pricing – working question

• Step 9: work out the bottom of the fraction in the 2nd part of
the formula (in pink)

• Price = 904.939599 + $1000 X

• Price = 904.939599 + $1000 X

Bond Pricing – working question

• Step 10: work out the fraction in the 2nd part of the formula
(in pink)

• Price = 904.939599 + $1000 X

• Price = 904.939599 + $1000 X

Bond Pricing – working question

• Step 11: do the multiplication of the 2nd part of the formula

(in pink)

• Price = 904.939599 + $1000 X

• Price = 904.939599 + 95.06040102

Bond Pricing – working question

• Step 12: add the two parts together

• Price = 904.939599 + 95.06040102

• Price = $1000.00

• Don’t forget the answer needs to be in to 2 decimal places

as it is in terms of money and also the correct sign for the
currency