Calculate the value of a bond with face value of 1000 usd paying interest of 8%...

Calculate the value of a bond with face value of 1000 usd paying interest of 8% over 5 tears and a yield of 7%

Solutions

Expert Solution

Face value is same as Maturity value	1000
Coupon %	8%	or	8% of 1000 =	80
Term (years) or n	5
yield%	7%

Bond price (Bp)=

Present value of all coupon payments

Present value of Maturity value of the bond ie value of the bond returned after the term is over

Bp =	coupon/(1+i%)¹+	coupon/(1+i%)² +	coupon/(1+i%)³ +	coupon/(1+i%)⁴ +	coupon/(1+i%)⁵ +	Maturity value/ (1+i%)⁵
	75	70	65	61	57	713
BP=	1041

Bp can also be calculated using below formula in cases where term is very long
Bp =	Present value of annuity (coupon paid at the end of every year till 5 years)	+	Present value of Maturity value of the bond ie value of the bond returned after the term is over

Bp =	Coupon ((1-(1+i%)^-n)/i%) +	Maturity value/ (1+i%)^n
	80 ((1-(1+7%)^-5)/7%) +	1000/ (1+7%)^5
	328	713
Bp=	1041

* In case of any query please revert back. A positive feedback would be appreciable in case the soultion found is helpful

jeff jeffy answered 1 year ago

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