Question

If a three-year bond with a $1,000 face value has a coupon rate of 3.5%, and...

If a three-year bond with a $1,000 face value has a coupon rate of 3.5%, and if the current market interest rate is 2%, what is the market price of the bond? (Do not include the dollar sign in your answer, and round to two decimal places.)
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Answer #1

Face value of bond = $1,000

Coupon rate = 3.5% or 0.035

Annual coupon payment = Face value of bond * Coupon rate

Annual coupon payment = $1,000 * 0.035 = $35

The annual coupon payment is $35.

Current market interest rate (i) = 2%

Years to maturity (n) = 3 years

Calculate the market price of the bond -

Market price = Annual coupon payment(P/A, i, n) + Face value(P/F, i, n)

Market price = $35(P/A, 2%, 3) + $1,000(P/F, 2%, 3)

Market price = [$35 * 2.8839] + [$1,000 * 0.9423]

Market price = $100.9365 + $942.3

Market price = $1,043.2365

Thus,

The market price of the bond is $1,043.24

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