Question

Use the bond term's below to answer the question
Maturity 7 years
Coupon Rate 4%
Face value $1,000
Annual Coupons
YTM 3% (interest rate)

Assuming the YTM remains constant throughout the bond's life, what is the bond's price in year 4?

A) $1,062.30 B) $1,028.29 C) $1,083.55 D)$1,008.12

Answer 1

The price of the Bond in Year 4

• 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	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 4.00%]	PMT	40
Market Interest Rate or Yield to maturity on the Bond [3.00%]	1/Y	3
Maturity Period/Time to Maturity [7 Years – 4 Years]	N	3
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) = $1,028.29.

“Hence, the price of the Bond in Year 4 will be $1,028.29”