Find the price of a bond with face value $100 and $5 annual coupons that matures in four years, given that the continuous compounding rate is a) 8% or b) 5%.
Question 2.30: Find the price of a bond with face value $100 and $5 annual ...
a) If the continuous compounding rate is 8%, then the price of the bond will be
5e^{−0.08} + 5e^{−2 × 0.08} + 5e^{−3 × 0.08 }+ 105e^{ − 4×0.08} ≅ 89.06
dollars.
b) If the rate is 5%, then the price of the bond will be
5e^{−0.05} + 5e^{−2×0.05 }+ 5e^{−3×0.05} + 105e^{−4×0.05} ≅ 99.55
dollars.
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