There is a bond which has $1000 of face value, 5 year maturity, and annual interest payment of 10% on the face value. What is the appropriate price today if interest rate (or discount rate) is 12%?

What is the appropriate price today if interest rate (or discount rate) is 12%?

The answer is: $927.85

Explanation:

Face value of bond = $1,000

Years = 5

Coupon = 10%

Yield = 12%

Step 1:

Calculate the price of the bond from the following formula:

Bond price = C ×

Where:

C = coupon payment + interest

r = rate of interest + (yield or discount rate)

n = number of period

f = fair value of the bond

Step 2:

Calculate the coupon payment

Coupon payment = $1,000 × 10/100

Coupon payment = $100

Step 3:

Calculate the bond price with the formula given in the step 1:

Bond price = C ×

Bond price = $100 ×

Bond price = $927.85 (answer)

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