Question

A 10-year bond paying 8% annual coupons pays $1000 at maturity. If the required rate of return on the bond is 7%, then today the bond will sell (rounded to the nearest cent) for

Answer 1

Bond Price = $1070.235815 rounded off to $1070.24

Step-by-step explanation:

To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is an annual bond, the coupon payment, number of periods and annual YTM will be,

Coupon Payment (C) = 1000 * 0.08 = 80

Total periods (n)= 10

r or YTM = 7%

The formula to calculate the price of the bonds today is attached.

Bond Price = 80 * [( 1 - (1+0.07)^-10) / 0.07] + 1000 / (1+0.07)^10

Bond Price = $1070.235815 rounded off to $1070.24