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?

Solutions

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

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