Answer:
The bond will be worth $925.394 1 year from now.
Explanation:
Customarily the amount of payment that is given to the bond holder at maturity is $1,000, this is known as the face value.
The value of a bond can be determined using the expression below;
T=V c+V face value
where;
T=total bond value
V c=present value of coupon payments
V face value=present value of the face value, and
V c=∑{C/(1+r)^t}
C=future value of coupon payments
r=yield to maturity
t=number of periods
V face value=F/(1+r)^T
F=face value of the bond
T=time to maturity
In our case;
C=7% of 1,000=(7/100)×1,000=$70
r=10%=10/100=0.1
t=years 1, 2 and 3
F=$1,000
T=4 years
replacing;
V c=∑{C/(1+r)^t}={70/(1+0.1)^1}+{70/(1+0.1)^2}+{70/(1+0.1)^3}=$174.0796
V face value=F/(1+r)^T={1,000/(1+0.1)^3}=$751.315
T=174.0796+751.315=$925.394
