Question

Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of $1,160. Jim is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 10 percent interest, and it has 20 years remaining until maturity. The current yield to maturity on similar bonds is 8 percent. a. Calculate the present value of the bond. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)

Answer 1

Answer:

Bond Price or Present value = $1196.362948 rounded off to $1196.36

Explanation:

To calculate the quote/price of the bond today, which is the present value of the bond, we will use the formula for the price of the bond. As the bond is an annual bond, the annual coupon payment, number of periods and annual YTM will be,

Coupon Payment (C) = 1000 * 0.1  = $100

Total periods (n) = 20

r or YTM = 0.08 or 8%

The formula to calculate the price of the bonds today is attached.

Bond Price = 100 * [( 1 - (1+0.08)^-20) / 0.08]  + 1000 / (1+0.08)^20

Bond Price or Present value = $1196.362948 rounded off to $1196.36