Question

what is the price of a 4-year maturity bond with a 10oupon rate paid annually? (par values = $1,000.)

Answer 1

The price of the 4-year bond with a 10% coupon rate and $1,000 par value is $1,046.65.

Step-by-step explanation:

The price of a 4-year maturity bond with a 10% coupon rate paid annually and a par value of $1,000 can be calculated using the present value formula.

1. First, calculate the present value of the bond's coupon payments. Since the coupon rate is 10%, you will receive $100 per year for 4 years. Use the formula: Present Value = Coupon Payment / (1 + Interest Rate) ^ Year. For example, in the first year, the Present Value = $100 / (1 + 0.10) ^ 1 = $90.91.
2. Next, calculate the present value of the bond's face value. Since the bond has a par value of $1,000, use the formula: Present Value = Face Value / (1 + Interest Rate) ^ Year. For example, in the fourth year, the Present Value = $1,000 / (1 + 0.10) ^ 4 = $683.01.
3. Finally, sum up the present values of the coupon payments and the face value to get the price of the bond. In this case, the bond's price would be $90.91 + $90.91 + $90.91 + $90.91 + $683.01 = $1,046.65.