Stephanie would like to purchase a bond that has a par value of $1,000, pays $100 at the end of each year in coupon payments, and has three years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 12 percent, how much will Stephanie pay for the bond?

Question

Quizplus · Accepted Answer

The present value of the bond is the sum of the present values of the coupon payments and the present value of the par value at maturity. The present value of the coupon payments is:PV(coupon payments) = $100 x (1 - (1 + 0.12)^-3) / 0.12 = $248.69The present value of the par value at maturity is:PV(par value) = $1,000 x (1 + 0.12)^-3 = $703.28The total present value of the bond is:PV(bond) = PV(coupon payments) + PV(par value) = $248.69 + $703.28 = $951.97Therefore, Stephanie will pay $951.97 for the bond.

Stephanie Would Like to Purchase a Bond That Has a Par