Question

You purchase a 10 year, $1000 bond with a stated interest rate of 6.5%. Currently the interest rates have fallen to 5.75% . What is the present value of this bond?

Answer 1

The Present Value of the Bond is the aggregate value of the Present Value of the coupon amounts plus the present value of the face value

Face Value = $1,000

Annual Coupon Amount = $65 [$1,000 x 6.50%]

Yield to Maturity (YTM) = 5.75%

Maturity Years = 10 Years

The Present Value of the bond = Present Value of the Coupon payments + Present Value of Face Value

= $65[PVIFA 5.75%, 10 Years] + $1,000[PVIF 5.75%, 10 Years]

= [$65 x 7.44805] + [$1,000 x 0.57174]

= $484,.12 + $571.74

= $1,055.86

“Therefore, the Present Value of the Bond would be $1,055.86”