Question

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell

Answer 1

Answer:

Price  of Bond= $907.766

Explanation:

The price of the bond is the present value of its future cash flow discounted at the required rate of return of 5.5%.

Price of Bond = PV of interest payment +PV of redemption value

PV of interest payment:

interest payment = 5.5%× 1000= 55

PV = A × (1+r)^(-n)/r

A- 55, r - 7%, n- 10 years

PV = 55, r- 5.5%, n- 10

PV = 55× 1.07^(-10)/0.07= 399.417301

Present Value of redemption

PV = F× (1+r)^(-n)

F= 1000, r- 7%, n- 10 years

PV = 1,000× 1.07^(-10)= 508.3492921

Price  of Bond =  508.3492921  + 399.417301= 907.7665931

Price  of Bond= $907.766