Question

You may attempt this question 3 more times for credit. What is the price today (in dollars and cents) of a 3-year 8.75% coupon rate bond that returns the par value of $1000 at maturity. Use a required rate of return of 8.50%? You should set your calculator for at least four decimal places of accuracy. I'll remind you of this from time to time but this is a working rule throughout the semester. Place your answer in dollars and cents. Do not include a dollar sign or comma in your answer. This is another rule that I'll remind you of but should be a working rule throughout the semester.

Answer 1

Solution:-

Bond price= Interest income * [{1-(1+r)^-t}/r] + Maturity value/(1+r)^t

In the given case, the required variables are as follows:

r= 8.5%

t= 3 years

Maturity value= 1,000

Interest income= 1,000*8.75% = $87.5

Therefore,
Bond price= 87.5*[{1-(1+8.5%)^-3}/8.5%] + 1,000/(1+8.5%)³

Bond price= 223.4771 + 782.9014

Bond price= 1006.38