Question

Company A issued 15-year, noncallable, 8% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 8%. What is the current price of the bonds, given that they now have 14 years to maturity?

Answer 1

Coupon Rate = 8% or 0.08

Face Value = $1000

Coupon Amount = $1000 * 0.08

= $80

Year to maturity (n) = 14 years

Market Interest Rate (r) = 8% or 0.08

Price of the Bond = Coupon Amount * Present Value Annuity Factor (r,n) + Face Value * Present Value Interest Factor (r,n)

= 80 * 8.2442 + 1000 * 0.3405

= 659.54 + 340.46

= $1000

Bond Price = $1000

As the Interest Rate and Coupon Rate are same, so Bond Price should trade at par i.e., at $1000

Note - Present Value Annuity Factor (8%,14) can be calculated in excel by using formula =-PV(8%,14,1) and Present Value Interest Factor (8%,14) by =1/((1+0.08)^(14))