P&G Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons, and the yield to maturity is 6.8%, what will the bond sell for?
Answer- D. $1025.32
Calculation of the Price of the bond
Price of bond = Present value of cashflows
Present Value of cashflows= Present value Principal + Present value interests
Present value of principal = $1000 x Presen value factor at 6.8% for 30 years = $1000 x (1/[1.068^30]) = $1000x013895 = $138.95
Annual interest = $1000 x 7% = $70
Present value of annual interest payments = Annual interest x Annuity factor at 6.80% for 30 years
=$70 x ( [1- [1/1.068^30] ] / 0.068) = $70 x 12.6624 = $886.368
Price of bond = $138.95 + $886.37 = $1025.32
Get Answers For Free
Most questions answered within 1 hours.