Question

In: Finance

A government bond with a face value of $1,000 was issued eight years ago and there...

A government bond with a face value of $1,000 was issued eight years ago and there are seven years remaining until maturity. The bond pays annual coupon payments of $90, the coupon rate is 9% pa and rates in the marketplace are 9.5% p.a. What is the value of the bond today?


a. $975.25

b. $1,427.50

c. $1,000.00

d. $972.83

e. $962.14

Solutions

Expert Solution

Current Price of the Bond

· 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 9.00%]

PMT

90

Market Interest Rate or Yield to maturity on the Bond [9.50%]

1/Y

9.50

Maturity Period/Time to Maturity [7 Years]

N

7

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) = $975.25.

Hence, the Price of the Bond will be (a). $975.25.

jeff jeffy answered 1 year ago
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