Question

1. COMPANY XYZ issues 10-year 8% annual coupon bonds. The market demands a return of 6%....

1. COMPANY XYZ issues 10-year 8% annual coupon bonds. The market demands a return of 6%. What should be the price of the bond? Assume a face value of $1,000

$1,147.20

$1,084.25

$865.80

$920.16
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Answer #1

Price of a bond is present value of cashflows (coupon and maturity value) associated iwth the bond.

Price of a bond is mathematically represented as:

where C is the annual coupon, i is the YTM (or market required return), M is the face value n is the number of periods.

For our bond, M = $1000, C = $80, n = 10, i = 6%

P = $1,147.20 --> Answer

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