What is the value of a $1,000 par value bond with a 12% annual coupon that will mature in 5 years if the bond is currently priced to yield 10%?

Question

Quizplus · Accepted Answer

To determine the price of the bond, we need to calculate the present value of its future cash flows. The annual coupon payment is $1,000 x 12% = $120. The bond will make five such coupon payments, plus the repayment of the $1,000 par value at maturity. Using the formula for present value of a bond, we get:
PV = (120/1.10) + (120/1.10^2) + (120/1.10^3) + (120/1.10^4) + (1,120/1.10^5)
PV = $93.82 + $85.29 + $77.54 + $70.49 + $709.68
PV = $1,036.82
Therefore, the value of the bond is $1,036.82, which is closest to answer choice C.

What Is the Value of a $1,000 Par Value Bond