Question

​A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?

Answer 1

Answer: Current price of bond = $1069.46

Step-by-step explanation:

Given that,

Par value of bond = $1,000

Annual coupon rate = 8%

Present annual yields on similar bonds = 6%

Maturity Period = 4 years

Current Price of bond =
`coupon[(1 - (1+r)^(-t) )/(r)] + (Face\ Value)/((1+r)^(t) )`

=
`80[(1 - (1+0.06)^(-4) )/(0.06)] + (1000)/((1+0.06)^(4) )`

=
`80[(0.208)/(0.06)]+ 792.14`

= 277.32 + 792.14

= $1069.46