Question

A negotiable, corporate bond is being offered for sale by individual Equal 2. The bond has a face value of $1,000 and a coupon rate of 8% with the next payment in exactly one year. The maturity of the bond is in 8 years. The interest rate on similar risk bonds is 8%. What is the market value of the bond being offered for sale by individual Equal 2?

Answer 1

The cash flow for each of the years is as follows:
Year One = $80

Year Two = $80

Year Three = $80

Year Four = $80

Year Five = $80

Year Five = $80

Year Six = $80

Year Seven = $80

Year Eight = $1080

Thus, the PV of the cash flows is as follows:

Year One = $80 / (1.08) to the 1^st power = $74.08
Year Two = $80 / (1.08) to the 2^nd power = $ 68.56
Year Three = $80 / (1.08) to the 3^rd power = $ 63.52
Year Four = $80 / (1.08) to the 4^th power = $ 58.80
Year Five = $80 / (1.08) to the 5^th power = $ 54.48

Year Six = $80 / (1.08) to the 6^th power = $ 50.40

Year Seven = $80 / (1.08) to the 7^th power = $ 46.64

Year Eight = $1080 / (1.08) to the 8^th power = $ 583.20

Now to find the value of the bond:
Value = $74.08 + $68.56 + $63.52 + $58.80 + $54.48 + $50.40 + $46.64 + $583.20
Value = $999.68