Bond Note 2 Pricing Example-2

Bond Note 2 Pricing Example-2 - BOND PRICING I Bond Pricing...

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BOND PRICING I. Bond Pricing on Coupon dates Take the present value of all cash flows (i.e., the present value of an annuity of the coupon payments plus the present value of bond’s face value) Example 1: Treasury Note; Maturity 2/15/2016; Coupon 4.50% (Coupon dates: 2/15 and 8/15); Yield 4.540%; Pricing Date 2/15/07 after the 2/15/07 coupon has been paid. ) i + (1 M ) i + (1 C ) i + (1 C ) i + (1 C = P n n 2 1 + + + + Where: P = Price ($) C = Semi-annual Coupon ($) = $4.50/2 = $2.250 M = Maturity Value ($) = 100 n = # coupon payments remaining = 18 i = Periodic interest rate (i.e. regular yield/2) = 4.540%/2 = 2.270% ( 29 ( 29 ( 29 ( 29 7072 . 99 0227 . 1 25 . 102 0227 . 1 25 . 2 0227 . 1 25 . 2 0227 . 1 25 . 2 18 17 2 1 = + + + + = P Or P = 2.25 PVIFA 2.27%,18 + 100 PVIF 2.27%,18 = 99.7072 (Calculator inputs: n=18, i=2.27%, Pmt=2.25, FV=100, PV=?) II. Bond pricing on non-coupon dates A. TREASURIES Example: Treasury Bond; Maturity 2/15/2016; Coupon 4.50% (Coupon dates: 2/15 and 8/15); Yield 4.540%; Pricing Date 3/22/07 1. Determine the price using the standard semiannual compounding model at the next coupon date. P1 = 2.25 PVIFA 2.27%,17 + 100 PVIF 2.27%,17 = 99.720509 (Calculator inputs: n=17, i=2.27%, Pmt=2.25, FV=100, PV=?) 2. Add the coupon payment to be received at the next coupon date (not included in step 1). This generates the value of the bond on the next coupon date. P2 = P1 + Coupon = 99.7205 + 2.2500 = 101.970509 3. Price Paid : Discount the sum found in step 2 back to time 0, i.e. the settlement date. This is the price of the bond including the accrued interest owed to the seller, i.e., the price paid for the bond.
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