Question

Consider a bond with a coupon rate of 10% and annual coupons. The par value is $1,000, and the bond has 5 years to maturity. The yield to maturity is 11%. What is the value of the bond

Answer 1

Answer:

Explanation:

present value of future cash flows is the value of bond

calculate the present value as follows

there is series of cash flows at 10 % that is 100 for five years present value will be calculated using annuity formula.

at the end one time payment of 1000 will be made present of value of such payment will calculated using compound formula.

Cashflow Discount Factor Present Value

1000           0.593451328 593.4513281

100                   3.695897018 369.5897018

                                        963.0410298

compound formula = 1000/(1+7.7%)^5

Annuity Formula     =  100 * (1-(1+11%)^-5) / 11%