Reference no: EM132375643

Currently, a bond has the face value of $1,000, the remaining term of 2 years the coupon interest to be paid every six months and its coupon rate is set as follows:

The coupon rate = the annual yield on 10-year GOC bond, prevailing at the time of payment (call it X) + 3.5%

a) Suppose the required yield to maturity of the bond is 7% per annum and it is expected to stay the same. X is expected to be 3%, 4%, 4.5% and 5% at the end of the 1st6 month period, 2nd6 month period, 3rd6 month period and 4th6 month period respectively. Find the current price of the bond.

b) Consider the same data in the above question, and now assume that the required annual yield to maturity of the bond, denoted by k, will change with X as follows:

K= X + 4%

Recalculate the current price of the bond.