Question

The $1,000 face value ABC bond has a coupon rate of 6%, with interest paid semi-annually, and matures in 5 years. If the bond is priced to yield 8%, what is the bond's value today?

Answer 1

value of a bond = [present value of annuity factor *bond interest]+ [present value factor * face value of bond]

here,

present value of annuity = [1-(1+r)^(-n)]/r

r= 8% per year

=>8%* 6/12

=>4%

=>0.04.

n= 5 years * 2 semi annual periods

=>10

=>[1-(1.04)^(-10)]/0.04

=>8.110895.

interest payment = $1000*6%*6/12=>$30.

present value factor =1/(1+r)^n

=>1/(1.04)^10

=>0.67556417

face value =1000

value of bond = [8.110895*30]+[0.67556417*1000]

=>243.33+675.56

=>918.89.