Question

Suppose that all investors expect that interest rates for the next 4 years will fall, resulting in a downward sloping yield curve. What is the price of a bond maturing in 12 years with a 7% coupon rate paid semi-annually, priced to yield 6.75%? (Par value = $1,000)

Answer 1

The price of the bond can be calculated as:

P = ∑(i=1 to 24) (0.03875 * (1 - (1 + 0.03875)^(-2i)) / 0.0675 + 1000/(1 + 0.0675)^(24)

Using this formula, we get:

Price = $1,157.31

Therefore, the price of the bond is approximately $1,157.31.