Solution in Excel is
Thus Price paid was 901.01
Analysis (for understanding) | 1.05 | |||
Year | Amount received | Period | PVF @1.05 | PV |
0.5 | 40 | 1 | 0.95 | 38.10 |
1 | 40 | 2 | 0.91 | 36.28 |
1.5 | 40 | 3 | 0.86 | 34.55 |
2 | 40 | 4 | 0.82 | 32.91 |
2.5 | 40 | 5 | 0.78 | 31.34 |
3 | 40 | 6 | 0.75 | 29.85 |
3.5 | 40 | 7 | 0.71 | 28.43 |
4 | 40 | 8 | 0.68 | 27.07 |
4.5 | 40 | 9 | 0.64 | 25.78 |
5 | 40 | 10 | 0.61 | 24.56 |
5.5 | 40 | 11 | 0.58 | 23.39 |
6 | 40 | 12 | 0.56 | 22.27 |
6.5 | 40 | 13 | 0.53 | 21.21 |
7 | 40 | 14 | 0.51 | 20.20 |
7 | 1000 | 14 | 0.51 | 505.07 |
PV | -901.01 |
Further since market rate (10%) is more than Coupon rate (8%), so Bond is purchased (901.01) at discount (i.e. less than Face Value of 1000)
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