00:01
In the given question, we need to find out the current price of the bond and it is given that the kevin roger is interested in buying a five -year bond that pays a coupon rate of 10%.
00:10
Now, first of all, let assume the face value of the bond is $1 ,000.
00:21
Phase value of bond be $1 ,000.
00:27
Now, it is given that the bond pays a coupon rate of 10 % on semi -annual basis.
00:34
So the coupon rate is given as 10 % and the payment is semi -annual.
00:45
That means the coupon payment per period is going to be, we had a face value that we have assumed to be $1 ,000 times 10 % and it is being paid semi -annual.
01:03
So therefore one by two, so this comes to $50.
01:06
So this is the coupon payment per period.
01:08
Now the bond has a time to maturity of 5 year and it is given that the current market rate of similar bond is 8 .8%.
01:19
That means market yield rate is given to be 8 .8%.
01:32
Now since the coupon are being paid semi -annual, that means if we want to calculate the market yield rate, then this is going to be 8 .8 % divided by 2 and that comes to 0 .04 and the total period this market yield rate will be per period actually and we have total period to be the bond is of 5 years and the total 1 year there will be 2 period that is semi -annual payment are being made so total period comes to 10 so now we can easily find out the current price of the bond.
02:23
So the current price of bond is equals to c times 1 minus 1 plus r to the power minus n upon r plus the face value divided by 1 plus r to the power n.
02:45
Now here c refers to the coupon payment per period and r denotes market rate per period and this n refers to total period.
03:11
Now the coupon payment per period we have calculated to be $50 and the market rate per period is 0 .04 and the total period we have 10...