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

To calculate the price of the bond, we need to use the formula: 
Price of bond = (Coupon payment / Yield) x (1 - 1 / (1 + Yield) ^ n) + Par value / (1 + Yield) ^ n 
Where: 
Coupon payment = $100 
Yield = 12% = 0.12 
n = 3 years 
Par value = $1,000

Plugging in the values: 
Price of bond = ($100 / 0.12) x (1 - 1 / (1 + 0.12) ^ 3) + $1,000 / (1 + 0.12) ^ 3 
Price of bond = $790.79 + $161.18 
Price of bond = $951.97

Therefore, Stephanie will pay $951.97 for the bond.

Stephanie Would Like to Purchase a Bond That Has a Par