As with most bonds, consider a bond with a face value of $1,000. The bond's maturity is 28 years, the coupon rate is 14% paid annually, and the discount rate is 12%.
What should be the estimated value of this bond in one year?
Price of the bond after 1 year, is the sum of the discounted | |
value, as at t1, of the maturity value payable at EOY 28 | |
and the discounted value of the 27 annual interest payments. | |
Here, | |
the maturity value is $1,000 receivable at EOY 28 and | |
the 27 annual interest payments constitute an annuity. | |
27 [28-1] years are taken as the value is to be found out at t1. | |
Hence, price of the bond after 1 year = 1000/1.12^27+140*(1.12^27-1)/(0.12*1.12^27) = | $ 1,158.85 |
As with most bonds, consider a bond with a face value of $1,000. The bond's maturity...
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