Question

What is the price of a 5 year bond with a 8% annual coupon rate and face value of $1,000? The prevailing market annual interest rate is 2%. Coupons are to be paid annually.

Answer 1

Price of Bond is the present value of cash flow from Bond.
Present Value of coupon Interest					$             80	x	4.7135	=	$     377.08
Present Value of Par Value					$       1,000	x	0.9057	=	$     905.73
Present Value of cash flow									$ 1,282.81
So, Price of Bond is		$ 1,282.81
Working:
	Present Value of annuity of 1			=	(1-(1+i)^-n)/i		Where,
				=	(1-(1+0.02)^-5)/0.02		i	2%
				=	4.7135		n	5
	Present Value of 1			=	(1+i)^-n
				=	(1+0.02)^-5
				=	0.9057
	Annual Coupon Interest			=	Face Value x Annual Coupon Rate
				=	$       1,000	x	8%
				=	$             80