Question

A sold B the following bond on Dec 31, 2016. Calculate the price the bond should...

A sold B the following bond on Dec 31, 2016. Calculate the price the bond should have been sold at.

Issue Date: Dec 31, 2012

Face Amount: $2,000,000

Face Interest Rate: 7%

Term of Bond: 10 years

Market Interest Rates: 8%(Dec 31, 2012)

9%(Dec 31, 2016)

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Answer #1
The value of a bond is the sum total of the PV of the expected cash
flows from the bond, if it is held till maturity, the discount
rate being the market interest rate, which is 9%.
The expected cash flows from the bond are:
*the maturity value of $1000, receivable at Dec 31, 2022.
*the annual interest payments of $70, which constitute an annuity.
Sale price on Dec 31, 2016 = 1000/1.09^6+70*(1.09^6-1)/(0.09*1.09^6) = $         910.28
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