A three-year bond with 10 percent coupon rate and $1,000 face value yields 8 percent. Assuming annual coupon payments, calculate the price of the bond.

Question

Quizplus · Accepted Answer

The price of the bond is calculated using the present value of its future cash flows, which include the annual coupon payments and the face value at maturity. With a coupon rate of 10% on a $1,000 face value, the annual coupon payment is $100. The bond yields 8%, so the present value of the cash flows is calculated using this yield. The price is the sum of the present values of the three $100 coupon payments and the $1,000 face value, discounted at 8%, which equals $1,051.54.

A Three-Year Bond with 10 Percent Coupon Rate and $1,000