Question

What is the value of a bond that matures in 9 years, has an annual coupon payment of $100, and has a par value of $1000? Assume a required rate of return of 10%, and round your answer to the nearest $10. $1,190 $940 $900 $1,000

Answer 1

2 ways to solve this question

Way-1:

Yield of bond = coupon payment/par value of bond = 100/1000 = 10%

Yield of bond = required rate of return

This means the value of bond = par value of bond irrespective of no of years

So, Value of bond = $1000

Way -2

value of bond = (coupon/required return)*(1-(1/(1+reqd return))^20) + terminal value/(1+reqd return)^20

VB = (100/.1)*(1-(1/1.1)^20) + 1000/(1.1)^20

VB = 1000(1-0.9090^20) + 1000/6.72

VB = 1000(1-0.148) + 148.8

VB= 852 +148.8

VB= 1000