Question

As with most bonds, consider a bond with a face value of $1,000. The bond's maturity is 12 years, the coupon rate is 10% paid annually, and the discount rate is 12%.

What should be the estimated value of this bond in one year?

Enter your answer in terms of dollars, rounded to the nearest cent.

Answer 1

After one year, remaining life of bond = 12 - 1 = 11 years.

Therefore the Estimated value of the bond in one year = {Coupon/(1+r)^1} + {Coupon/(1+r)^2} + ...................................................+ {Coupon/(1+r)^11} + {Face value/(1+r)^11}

Coupon = Face Value * Coupon rate = $1000 * 10% = $100

Estimated value of the bond in one year = {$100/(1+0.12)^1} + {$100/(1+0.12)^2} + ...................................................+ {$100/(1+0.12)^11} + {$1000/(1+0.12)^11} = $881.25

Estimated value of the bond in one year = $881.25