Question

On 31 December 20X0, 008Corporation issues a bond with a three year maturity and a principal...

On 31 December 20X0, 008Corporation issues a bond with a three year maturity and a principal of $1,000. The coupon rate is 10% per annum. The current market rate on similar bonds is 12%. What is the present value of the bond on 31 December 20x0?

Note: For numeric responses, please do not use symbols/signs such as $ or ,. If you use such symbols your answers will be marked wrong even if they are correct. Please round to the nearest whole number. For example 5000 is fine, but $5000, $5,000,or 5,000.17 are not.

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Answer #1

Principal = $1000
Time to maturity (n) = 3 years
Coupon rate (i) = 10%
Market rate of return = 12%
Coupon Payment (C) = 1000 * 10% = $ 100

where, C= coupon payment
i = market interest rate
n = number of payments
M = par value

Present Value of Interest Payments = 100/(1.12) + 100/(1.12)2 + 100/(1.12)3
= 89.2857 + 79.7194 + 71.178
= 240

Present Value of principal = 1000 / (1.12)3
= 712
Net Present Value of a Bond on 31 December 20X0 =  Present value of principal + Present value of interest payments
= 712 + 240
= 952

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