Question

Bob is evaluating a bond issue to determine the right price for the bond. In his evaluation, he gathers the following information:

N = 8 years INT = .025 or 2.5% PMT = $25 FV = $1,000 (par value)
What is the above bond issue worth in today's dollars?
a. $1,000
b. $1,181.63
c. $1,200.50
d. None of the above

Answer 1

The price of the bond is $1000. Thus, option a is the correct answer.

Step-by-step explanation:

The price of a bond is calculated using the present value of the interest payments made by the bond, which is in the form of an annuity, plus the present value of the face value of the bond. The present value is calculated by discounting the annuity of interest and the face value by the YTM or yield to maturity. In case YTM is not provided, we assume that it is same as or equal to the coupon rate paid by the bond.

The formula for the price of the bond is attached.

Bond Price = 25 * [(1 - (1+0.025)^-8) / 0.025] + 1000 / (1+0.025)^8

Bond Price = $1000