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stepan [7]
3 years ago
6

Assume that a bond makes 10 equal annual payments of $1,000 starting one year from today. The bond will make an additional payme

nt of $100,000 at the end of the last year, year 10. (This security is sometimes referred to as a coupon bond.) If the discount rate is 3.5$% per annum, what is the current price of the bond? (Hint: Recognize that this bond can be viewed as two cash flow streams: (1) a 10-year annuity with annual payments of $1,000, and (2) a single cash flow of $100,000 arriving 10 years from today. Apply the tools you've learned to value both cash flow streams separately and then add.)
Business
1 answer:
ohaa [14]3 years ago
6 0

Answer:

$79,208.48

Explanation:

The computation of the current price of the bond is shown below:-

<u>Number of    Cash flow    PV annuity factor    Discounted cash </u>

<u>years                                                                        flow</u>

1 -10  years     $1,000                 8.3166                      $8,316.6

10 years        $100,000            0.7089188                $70,891.88

Current price of the bond                                        $79,208.48

Refer to the PV annuity factor so that we get to know the discounting factor value.

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