Question

Compute the value of the following bonds assuming a 3% discount rate (required rate of return):

A zero-coupon bond that pays $1,000 in five years

A bond that pays $1,000 in five years, with five annual coupon payments of $20 each

What is the coupon rate if coupon payments are $20 per year? At what discount rate would the value of the bond be “at par” (e.g., be worth $1,000?). Explain your reasoning.

Answer 1

a)Price =PVF 3% ,5 * Amount

            = .86261*1000

            = $ 862.61

Price of bond 2 = [PVA 3%,5*Interest ] +[PVF 3%,5*Face value]

       =[4.57971*20]+ [.86261*1000]

          = 91.59+ 862.61

            = 954.20

2)coupon rate =coupon payment /face value

            = 20/1000

                = .02 or 2%

In order to sell at par discount rate must be equal to coupon rate on bond = 2%