Question

What is the price of a 3 percent coupon bond, payable annually, with a $5,000 face value that matures in 4 years if we assume that the annual market interest rates are 3.5 percent?

Answer 1

Formula :

P = C/(1 + r) + C/(1 + r)² + C/(1 + r)³ ------------((F + C)/(1 + r)ⁿ

where P = Present Value, C = Coupon Value = 3% of F(Face value) = (3/100)*5000 = 150, r = interest rate = 3.5% = 0.035 and F = Face value = 5000, n = years to maturity = 4

=> P = 150/(1 + 0.035) + 150/(1 + 0.035)² + 150/(1 + 0.035)³ + (5000 + 150)/(1 + 0.035)⁴

=> P = 4908.17

Price of this Bond will be the Present value of this bond = Present Value(P) = 4908.17

Hence, Price of this Bond = 4908.17