Calculating Prices of Bonds with Semi-Annual Coupon Payments (Using Excel)

[@lg2058]

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[@musicaddicted1999]

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[@luistorralvo410]

Hi! Hello, I have a question, if the rates go down (the YTM) halfway, is the FV discounted at the initial or final rate? Thanks for this video.

[@professorikram]

Great question. At ANY given point in time, the price of bond depends on coupon payments and the YTM at that time. So if the rates (i.e. YTM) goes down half way, the PV will be calculated using that lower yield, meaning price of the bond will go up. Many times, bond investors invest in a 10-year or 20-year bond, not because they want to hold on to it till maturity, but because they are hoping that in a few years (or months) interest rates (and therefore yields) will go down, causing the price of their bonds to increase - at which point, they can sell their bonds at a profit and move on to other investments. Hope this helps! Thanks for the question.

[@luistorralvo410]

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[@faithfultrue9605]

Thanks sir for the knowledge shared!

[@pujadevi8444]

hey there, not understanding why YTM = discount rate. in the previous video, we saw bond pricing dependent on market interest rate. is the annuity formula here saying that the bond offers 8% APR/coupon but the interest rate/market rate is actually 10%? in which case, why is holding this particular bond held til maturity going to equal the same value as buying a new bond from the market today?

[@professorikram]

Yes, this is saying that coupon (APR) is 8% but market rate (ie the rate bond investors are requiring) is 10%. That is why the value of this bond is less than its face value. I’m not sure I fully understand what you mean by “why is holding this bond till maturity equal to the same value as buying a new bond”. New bonds will likely be issued with a 10% coupon, which is what investors require. So it will have a value of $1,000. By investing in our bond that is only offering 8% coupon , investors will make some money in coupon payments and the remainder in the form of increase in bond price over time.

[@heatmikepark]

For bonds paying semi annually, can we consider the discount rate as 10% and coupon rate as 80 while considering the maturity as 7 years? will that make any difference while calculating.

[@makeittrades5750]

Hello Professor Ikram, if you to the following using the first example it won't work and I can' t figure out why. I know the answer by summing the present value of the principle and the present value of the interest. The answer is $5,218,801 but I am really bothered as to why the first function (PV) works on your example and not for this example unless you do it once for the principle and another time for the interest. You got the answer with just one prompt. Any thoughts would be appreciated. Thank you for all that you do! The question: Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2018 on January 1, 2018. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

[@professorikram]

Thanks for your question. The PV function in Excel is well suited to dealing with annuities, i.e. when you are expected a fixed amount at regular intervals for a certain number of time periods. The cash flow stream from bonds is well suited for that. You can also use the NPV function, but then you would separately need to include a stream of coupon payments in the function. It's do-able but less "elegant".

[@Invest-qh3jh]

Thanks