Question

8% coupon bond with $1,000 face value, maturing in 20 years. Payments are paid annually.

A. If the market rate is 9%, what is the value of this bond?   
B. If the market rate is 7%, what is the value of this bond?

with explanation please

Answer 1

(A)-The Price of the Bond if the market rate is 9.00%

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 8.00%]	PMT	80
Market Interest Rate or Yield to maturity on the Bond [9.00%]	1/Y	9
Maturity Period/Time to Maturity [20 Years]	N	20
Bond Price/Current Market Price of the Bond	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $908.71.

“The Price of the Bond will be $908.71”

(B)-The Price of the Bond if the market rate is 7.00%

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 8.00%]	PMT	80
Market Interest Rate or Yield to maturity on the Bond [7.00%]	1/Y	7
Maturity Period/Time to Maturity [20 Years]	N	20
Bond Price/Current Market Price of the Bond	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,105.94.

“The Price of the Bond will be $1,105.94”