Answer:
Price of bond= $1,185.72
Explanation:
<em>The price of a bond is the present value (PV) of the future cash inflows expected from the bond discounted using the yield to maturity.
</em>
These cash flows include interest payment and redemption value
The price of the bond can be calculated as follows:
Step 1
PV of interest payment
annual coupon rate = 7.1%
Annual Interest payment =( 7.1%×$1000)= $71
Annual yield = = 5.5%
PV of interest payment
= A ×(1- (1+r)^(-n))/r
A- interest payment, r- yield - 5.5%, n- no of periods -19 periods
= 71× (1-(1.055)^(-19))/0.055)
= 71× 11.60765352
= 824.143
Step 2
PV of redemption value (RV)
PV = RV × (1+r)^(-n)
RV - redemption value- $1000, n- 19, r- 5.5%
= 1,000 × (1+0.055)^(-19)
= 361.579
Step 3
Price of bond = PV of interest payment + PV of RV
$824.143 + $361.579
Price of bond= $1,185.72
