Answer: The market value of the bond is $692.74.
Explanation:
Given that,
10-year bond pays = 5%
Face value = $1,000
Bonds currently yielding = 10%
Annual payment = 5% of $1,000
= $50
According to the annuity table (attached with the answer),
10 annual payments of $50 at 10% = 6.144
So, the present value of the interest payments = $50 × 6.144
= $307.2
present value of the principal repayment at the end of 10 years:
= [tex]\frac{1,000}{(1.10)^{10} }[/tex]
= $385.54
Hence,
$307.2 + $385.54 = $692.74
The market value of the bond is $692.74.
