Question

You are considering purchasing a bond. The bond will pay you $100 at the end of each year for three years. At the end of the third year, the bond will also pay you back its $1,000 face value. Assuming a 10% discount rate, how much is this bond worth today? Round to the nearest dollar

Answer 1

Face Value = $1,000
Period remaining till maturity = 3 years
Coupon amount = $100
Discount Rate = 10%

Value of Bonds = Present Value of Coupons + PV of Principal Amount
                        = [PVAF (10%,3) * 100] + [PVIF (10%,3) * 1000]
                         = (2.4869 * 100) + (0.7513 * 1000)
                         = $248.69 + $751.30
                         = $1,000 (rounded off)

Present Value Factor have been calculated as = (1/1+r)n

Where
r= Required rate of Return (Discount rate)
n= No of Periods

PVAF (10%,3) is calculated by adding the PV Factor of 10% for 3 years