How to Calculate Bond Coupons and Purchase Price using Makeham Formula
How are bond coupons calculated?
A bond's coupon rate can be calculated by dividing the security's total annual coupon payments by the bond's par value. For example, a bond with a face value of $1,000 that pays a coupon of $25 semi-annually has a coupon rate of 5%.
How to evaluate the purchase price of a bond using the Makeham formula?
The Makeham formula is a mathematical formula that expresses the present value of cash flows in terms of repayments rather than the payments themselves. This formula is largely ignored in the financial literature, but as this paper shows, it has many useful applications in fixed income analysis.
Bond Coupons Calculation
To calculate a bond's coupon rate, divide the total annual coupon payments by the bond's par value. For instance, a bond with a face value of $1,000 and pays a semi-annual coupon of $25 would have a coupon rate of 5%.
Calculate Purchase Price using Makeham Formula
To calculate the purchase price of a bond using the Makeham formula, you can use the formula: Purchase Price = (g / j)(C - K) + K. Where g represents the growth rate, j represents the yield rate, C is the redemption amount, and K is the present value of the redemption amount.
When evaluating bond coupons, it is crucial to understand how the coupon rate is determined. By calculating the coupon rate, investors can assess the periodic income they will receive from holding the bond.
Furthermore, with the Makeham formula in fixed income analysis, investors can determine the purchase price of a bond more accurately. This formula takes into account the growth rate, yield rate, redemption amount, and present value of the redemption amount to calculate the purchase price.
In the provided data, the purchase price using the Makeham formula is $376.3677 when the present value of the redemption amount is $353.20. By utilizing this formula, investors can make informed decisions when buying bonds and ensure they are getting a fair price based on various financial parameters.