Question

A $1000 par value bond will mature in 10 years. This bond pays a coupon of $90 every year. If investors require an annual return of 8%, what is the current price of this bond? Assume annual payments.

Answer 1

Current Price of Bond			$ 1,067.10
Working:
Current price of bond is the present value of future cash flows from bond.
Present value of annuity of 1			=	(1-(1+i)^-n)/i			Where,
			=	(1-(1+0.08)^-10)/0.08			i	8%
			=	6.710081			n	10
Present Value of 1			=	(1+i)^-n
			=	(1+0.08)^-10
			=	0.463193
Present Value of coupon			$             90	x	6.710081	=	$     603.91
Present Value of Par Value			$       1,000	x	0.463193	=	$     463.19
Present Value of cash flows							$ 1,067.10
Thus,
Current Price of bond is			$ 1,067.10