Question

How much would you pay for a P&G Bond that pays a 5% coupon, matures in 20 years and the yield on current bonds are 4%?

Answer 1

	Assume , face Value=	$1,000
	Fair Value of Bond=Present Value of future Cash Flows discounted at market yield
	Market yield=4%	0.04
	Present Value (PV) of cash flow= (cash flow)/(1+0.04)^N
	N= Year of Cash flow
	Year wise cash flows and PV of cash flows are given below:
	Annual Coupon payment	$              50	(1000*0.05)
	Year	Cash flow	PV of Cash flow
	1	$50	48.07692308
	2	$50	46.22781065
	3	$50	44.44981793
	4	$50	42.74020955
	5	$50	41.09635534
	6	$50	39.51572629
	7	$50	37.99589066
	8	$50	36.53451025
	9	$50	35.12933678
	10	$50	33.77820844
	11	$50	32.47904658
	12	$50	31.22985248
	13	$50	30.02870431
	14	$50	28.87375414
	15	$50	27.76322514
	16	$50	26.69540878
	17	$50	25.66866229
	18	$50	24.68140605
	19	$50	23.7321212
	20	$50	22.81934731
	20	$1,000	456.3869462
		SUM	$           1,135.90
	Amount to be paid for the bond	$ 1,135.90