Question

"Stephanie would like to purchase a bond that has a par value of $1,000, pays $100 at the end of each year in coupon payments, and has three years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 12 percent, how much will Stephanie pay for the bond

Answer 1

The price of the bonds = $951.963

Step-by-step explanation:

The value of the bond is the present value (PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV) discounted at the yield rate

Value of Bond = PV of interest + PV of RV

The PV of interest payment

A ×(1- (1+r)^(-n))/r

A- interest payment, r- interest rate, n- number of years

Interest payment = 100

PV = 100× (1- 1.12^(-3))/0.12= 240.183

PV of redemption value

PV = RV× (1+r)^(-n)

RV- Redemption value - 1,000, r- interest rate, number of years, number of years- 3

PV = 1000× 1.12^(-3) = 711.7802

The value of bond = 240.18 + 711.78= 951.963

The price of the bonds = $951.963