Suppose you are considering bu

Suppose you are considering buying a $2,000,000 face value ofbond in the secondary market. The bond was issued in 2016 and isdue in 2036. It is now 2020. In 2016, the appropriate marketinterest rate to price the bond was 8%. This bond pays quarterlyinterest payments. Currently, other bonds with similar riskcharateristics are being issued into the market with 12% coupons.How much would you be willing to pay for this bond? Please tell methe price per $2,000,000 face value and the % of par. What is thename type of bond given its current price relative to its facevalue? on excel if you can please

Answer:

Bond Price:It refers to the sum of the present values of all likely couponpayments plus the present value of the par value at maturity. Thereis inverse relation between Bond price and YTM ( Discount rate )and Direct relation between Cash flow ( Coupon/ maturity Value )and bond Price.

Price of Bond = PV of CFs from it.

Bond price at the end of 2020:

Period Cash Flow PVF/ PVAF @2% Disc CF
1 – 64 $          60,000.00                        35.9214 $     2,155,284.89
64 $    2,000,000.00                          0.2816 $        563,143.41
BondPrice $    2,718,428.30

As Coupon Payments are paid periodically with regular intervals,PVAF is used.Maturity Value is single payment. Hence PVF is used.

Periodic Cash Flow = Annual Coupon Amount / No. times couponpaid in a yearDisc Rate Used = Disc rate per anum / No. of times coupon paid in aYear

What is PVAF & PVF ???PVAF = Sum [ PVF(r%, n) ]PVF = 1 / ( 1 + r)^nWhere r is int rate per AnumWhere n is No. of Years

How to Calculate PVAF using Excel ???+PV(Rate,NPER,-1)Rate = Disc rateNper = No. of Periods


 
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