Question

3.     The Piedmont Flyers have issued a 8-year bond with a face value of $1000. The price of the bond is $880. The market rate is 10% annually. What is the coupon payment?

PV

FV

PMT

N

I

Answer 1

To Solve this question we need a financial calculator

We are given the following information which we will have to feed in the financial calculator

PV = -880 (Current price of the bond)

FV = 1000 (Face Value of the bond recievable after 8 years)

N = 8 (Number of years)

I/Y = 10 (interest rate)

Then we will have to press CPT - PMT to get the annual coupan payments

PMT = 77.5067

Annual Coupan payments = 77.5067

PROOF of the solution

Bond price today is the present value of future coupan payments, discounting all the coupan payments of 77.5067 and face value of 1000 recievable at the end of 8th year at 10% we get the present value as 880 as shown below

Year	Cash Flow	Present Value @ 10%
1	77.51	70.46
2	77.51	64.06
3	77.51	58.23
4	77.51	52.94
5	77.51	48.13
6	77.51	43.75
7	77.51	39.77
8	1,077.51	502.66
		880.00