Hello, I can't figure this problem out. Can someone please help?



A bond can be valued using both the formula for a present value of a lump sum due in the future and the present value of the interest payments to be received (the stream of interest payments is an annuity).



1. A bond has a face value of $1000, a coupon interest rate of 4%, and three years to maturity. Interest is paid semi annually. The yield to maturity is 3.51%.



First we calculate the value of the lump sum principal payment due at maturity using the following formula:



PV=FV/(1+r)t



FV=principal payment of bond at maturity

r=yield to maturity interest rate on bond

t=years to maturity

Result



We then calculate the value of the semi annual interest payments using the following formula:

P

C=semi annual interest payment based on the coupon interest rate

r=yield to maturity interest rate on bond converted to semi annual basis

t=periods to maturity on a semi annual basis



Result







The value of the bond should be the sum of the above two results.



Value =__________________________



2. Now that you have done problem 1 consider the facts below:



A bond has a face value of $1000, a coupon interest rate of 3.5%, semi annual interest payments and 5 years to maturity and a yield to maturity of 4%.



Calculate the value of the bond as you did above.