Question

1. Ken Williams Ventures' recently issued bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5%. If the current market interest rate is 7%, at what price should the bonds sell?

please show how to solve using a calculator

Answer 1

Bond Price for 10 years = (C/ 1+i) + (C/(1+i)^2) +(C/(1+i)^3)+.......+ (C/(1+i)^10) + (P/(1+i)^10)

where,

C= coupon i.e 50 (=1000*5%)

i = Interest rate i.e 7%

P= Bond value at par i.e 1000

Bond Price for 10 years= (50/ 1+7%) + (50/(1+7%)^2) +.....+ (50/(1+7%)^10) + (1000/(1+7%)^10)

Year(n)	C	(1+i)^n	C/(1+7%)^n
1	50	1.07	46.73
2	50	1.1449	43.67
3	50	1.225043	40.81
4	50	1.310796	38.14
5	50	1.402552	35.65
6	50	1.50073	33.32
7	50	1.605781	31.14
8	50	1.718186	29.10
9	50	1.838459	27.20
10	1050	1.967151	533.77
		Bond Price	859.53

Therefore Bond will sell at 859.53