A bond that offers an annual coupon rate of 9%, with interest paid annually, has a...

A bond that offers an annual coupon rate of 9%, with interest paid annually, has a face value of $1,000. The difference between its yield to maturity and coupon rate is 4%. The bond matures in 8 years. What is the bond’s price?

Expert Solution

Price of the Bond

· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

· Here, the calculation of the Bond Price using financial calculator is as follows


Variables	Financial Calculator Keys	Figure

Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 9.00%]	PMT	90
Market Interest Rate or Yield to maturity on the Bond [9.00% + 4.00%]	1/Y	13
Maturity Period/Time to Maturity [8 Years]	N	8
Bond Price/Current market price of the Bond	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $808.05.

Hence, the Price of the Bond will be $808.05.

jeff jeffy answered 2 years ago

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