Answer:
$9,813.76
Explanation:
The net present value of the bond can be calculated using the following formula:
PV of Bond ($) = PV of future coupon payments (Step1) + PV of redemption Amount
So here
PV of Bond ($) = $743.76 (Step1) + $10,000 x Discount Factor at 5% and 2 years time
PV of Bond ($) = $743.76 + $10,000 / (1+5%)^2 = $743.76 + $9,070
PV of Bond ($) = $9,813.76
<u>Step 1: PV of future coupon payments</u>
And Present value of this annual cash flow that would be received in first 2 years is:
Present Value = Future Annual Cash Inflow (Step2) * Annuity factor at 5% and at 2 years time
Present Value = $400 * [1 - (1+r)^-n] / r
= $400 * [1 - (1+5%)^-2] / 5% = $400 x 1.8594 = $743.76
Step 2: Future Annual Cash Inflow
Annual return is the coupon interest received, so this implies that:
Annual Cash Inflow = Face value * Coupon rate
Here
Face value of the bond is $10,000
Coupon rate is 4%
So by putting values, we have:
Annual Cash Inflow = $10,000 x 4% = $400
