Question

In: Finance

XYZ Inc. has issued a 30-year bond with a coupon rate of 8%, the future value...

XYZ Inc. has issued a 30-year bond with a coupon rate of 8%, the future value of $1000, and a market rate of 9%. What is the current market price for the bond?

Expert Solution

Current Market Price of bond

$ 897.26

Working:

Current Market Price of bond is the present value of cash flow from bond throughout its life.

Present Value of annuity of $ 1

=

(1-(1+i)^-n)/i

Where,

=

(1-(1+0.09)^-30)/0.09

i

9%

=

10.2737

n

30

Present Value of $ 1 to be received in 30 years

=

(1+i)^-n

Where,

=

(1+0.09)^-30

i

9%

=

0.0754

n

30

Annual coupon payment

=

Par Value x Coupon rate

=

1000 x 8%

=

$ 80.00

Present Value of coupon

=

Coupon Payment x Present Value of annuit of $ 1

=

$ 80.00

x

10.2737

=

$ 821.89

Present Value of Par Value

=

Par Value x Discount factor

=

$ 1,000.00

x

0.0754

=

$ 75.37

Present Value of cash flow from bond

=

Present Value of coupon

+

Present Value of Par Value

=

$ 821.89

+

$ 75.37

=

$ 897.26

jeff jeffy answered 1 year ago

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