BankMart Inc. recently issued bonds that mature in 9 years. They have a par value of $1,000 and an annual coupon of 3%. The current market interest rate is 8%.What should be the bond's price?

The value of the bond is the present value(PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

Value of Bond = PV of interest + PV of RV

The value of bond for Bank Mart Inc can be worked out as follows:

Step 1

Calculate the PV of interest payments

Annual interest payment

= 3%× 1000 = 30

PV of interest payment

PV = A× (1- 1+r)^(-n)

A- 30, r- 8%, n- 9

30× ((1-1.08^(-9))/0.08)=187.41

Step 2

PV of redemption Value

PV = RV × (1+r)^(-n)

RV - 1000, r- 8%, n- 9

PV of RV = 1000 × 1.08^(-9) = 500.24

Step 3

Price of bond

Total PV = 187.41 + 500.24 = $687.66

Price of Bond = $687.66