A 10-year bond pays 5% on a face value of $1,000 similar bonds currently yielding 10%. What is the market value of the bond?

Respuesta :

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.

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