Question

A firm has a bond issue maturing in seven years with par value of $1,000. Those bonds make annual coupon payments of $70. The market interest rate on similar bonds is 8.50%. What is the bond’s price (round your answer to two decimal places)? (i) Describe and interpret the assumptions related to the problem. (ii) Apply the appropriate mathematical model to solve the problem. (iii) Calculate the correct solution to the problem.

Answer 1

Bond Valuation: The value of bond is the present value of the expected cashflows from the bond,discounted at Yield to Maturity(YTM).

Year	Cash flow	PVAF/[email protected]%	Present Value (Cashflow*PVAF/PVF)
1-7	70	5.1185*	358.30
7	1000	0.5649**	564.92

Current Market Price of Bonds = Cashflow*PVAF/PVF

= 358.30+564.92

= $923.22

*PVAF = (1-(1+r)^-n)/r

**PVF = 1 / (1+r)^n

Since the bonds coupon rate is lower than the market interest rate on similar bonds, the bond should sell at discount, ie; below par value.