My Math Forum Bonds et al...

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 October 16th, 2012, 08:20 AM #1 Math Team   Joined: Oct 2011 From: Ottawa Ontario, Canada Posts: 14,597 Thanks: 1038 Bonds et al... Trying to help someone with this problem" > You buy in the secondary market 10.000 10-year bonds of the Spanish Government, issued 5 years ago, > with a face value of 1,000€, and semi-annual coupons of 6.35% per annum. > 1.If the coupon rate for new issues 5-year Spanish Government bond is 4.05%, > how much do you have to pay for your bond purchase? > 2.What can you say about the bond price compared with the par value? Explain why? Can't figure out what is being asked...any of you guys can?
October 19th, 2012, 06:05 AM   #2
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Re: Bonds et al...

Quote:
 Originally Posted by Denis ...If the coupon rate for new issues 5-year Spanish Government bond is 4.05%,...
I think the key is in that tidbit although behind it is an assumption that's either in the text's background reading, or should've been explained better by the question's author.

The unstated assumption is that when new bonds are issued, they're set by the issuer with a coupon rate which allows the bond to be issued at par. Hence, to say that new 5-year issues are being given a 4.05% coupon is to equivalently say that the appropriate discount rate for 5-year Spanish govvies is also 4.05%, currently. With that in hand, the problem just becomes a plain vanilla discounting of the remaining cash flows of the bond in question at the 4.05% / 2 market discount rate.

That assumption doesn't always hold, but the question's wording seems to rely on it in this case.

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