Question

Suppose a two-year coupon bond has payments of $40 and a face value of $800. The interest rate is 8%. Compute the present value of the coupon payments and the principal payment of the bond. What is the price of this bond

Answer 1

present value of the coupon payments = 40(P/A, 8%, 2) = 40(1.783) = $71.32

the principal payment of the bond = 800(P/F, 8%, 2) = 800(0.8573) = $685.84

Price of bond = (0.08 * 800) (P/A, 8%, 2) + 800(P/F, 8%, 2)

                      = 64(1.783) + 800(0.8573)

                      = 114.11 + 685.84

                      = $800