The function s(t) = 0

Finance Dec 21, 2020

The function s(t) = 0.045 + 0.003t gives the effective annual rate of a zero coupon bond of maturity t, with t in years. Find the price of a 2 year coupon bond with semiannual coupons of 8% and a face/redemption value of $800,000. Problem #3: Answer correct to 2 decimals. Just Save Submit Problem #3 for Grading

Expert Solution

s(1/2) = 4.5% + 0.3*0.5 = 4.65%

s(1) = 4.5 + 0.3 = 4.8%

s(1.5) = 4.5 + 0.3*1.5 % = 4.95%

s(2) = 4.5 + 0.3*2 = 5.1%

coupon = 4% of 800,000 = 32,000

price = 32,000/1.0465^1/2 + 32,000/1.048 + 32,000/1.0495^1.5 + 832,000/1.051² = 844,791.46

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