Iâ€™m having trouble with this question about bonds:
What is the market price of a 12% p.a. semi-annual coupon bond with a face value of $100, 10 years to go until maturity when the current market yield is 10% p.a. compounded quarterly?
Since the timing of the rates donâ€™t match, Iâ€™m confused as to whether I find the effective rates for both and then work it out?
I found the effective rate for the coupon to be 12.36% and the Effective rate for the yield to be 10.38%.
Then to work out the interest payment, I did:
(0.1236/2) x $100 = $6.18
I also divided 10.38% by 2 to get 5.19% for the semi-annual yield rate.
Then I plugged the numbers into the following formula:
D = F/r[1 â€“ (1+r)^-n] + B/[(1+r)^n]
Where F = interest payment
B = face value of bond
And I got $112.14.
I wasnâ€™t provided with a solution for that but I donâ€™t think my method for working it out is correct.
Any help would be appreciated. Thank you.