A coupon bond that pays interest annually has a par value of $1,000, matures in 10 years, and has a yield to maturity of 8%.

A coupon bond that pays interest annually has a par value of $1,000, matures in 10 years, and has a yield to maturity of 8%. Calculate the intrinsic value (price) of the bond today if the coupon rate is 9%.

Expert Solution

Annual coupon=1000*9%=90

Hence price of bond=Annual coupon*Present value of annuity factor(8%,10)+1000*Present value of discounting factor(8%,10)

=90*6.7100814+1000*0.463193488

=$1067.10(Approx)

NOTE:

1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=90[1-(1.08)^-10]/0.08

=90*6.7100814

2.Present value of discounting factor=1000/1.08^10

=1000*0.463193488

jeff jeffy answered 2 years ago

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