Question

The current market price of a 7 year corporate bond with a 5% coupon if market interest rates are 6% would be: (enter answer as a decimal with two decimal places - XXXX.XX)

Answer 1

The value of the bond is computed as shown below:

= Present value of future coupon payments + Present value of par value

Present value is computed as follows:

= Future value / (1 + r)ⁿ

The coupon payment is computed as follows:

= 5% x $ 1,000

= $ 50

So, the price of the bond is computed as follows:

= $ 50 / 1.06¹ + $ 50 / 1.06² + $ 50 / 1.06³ + $ 50 / 1.06⁴ + $ 50 / 1.06⁵ + $ 50 / 1.06⁶ + $ 50 / 1.06⁷ + $ 1,000 / 1.06⁷

= $ 944.18 Approximately

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