Question

Suppose, two years ago, you purchased a 10-year coupon bond paying 4.5% interest annually with a face value of $1000. It is now two years later and you just received an interest payment yesterday (the bond matures in exactly eight years). You look in the paper and the yield on comparable debt is 4.25%. What is the bond currently worth?

Group of answer choices

$1,017                                                             
                                                                                   

$976

$1,135

none of them

$1,060

Answer 1

Solution:

2 years have passed since the purchase of the bond ie. 8 years are remaining. Value of a bond is present value of all future cash flows. THe bond will get a return at 4.5% per anum and $1000 at the end of 8 years. Thus value of bond can be found by discounting the return of the bond at Yield rate ie 4.25%

Year	Cash Inflow	4.25% Discounting Rate	PV of cash Flow
1	45	0.9592	43
2	45	0.9201	41
3	45	0.8826	40
4	45	0.8466	38
5	45	0.8121	37
6	45	0.7790	35
7	45	0.7473	34
8	1045	0.7168	749
			$ 1017

Thus the Value of Bond is $ 1017