Homework Answers
| Principle value | $ 100,000 | ||
| Coupon rate | 7% | ||
| Time in years | 10 | ||
| Discount rate | 5% | ||
| Annual coupon | $ 7,000 | ||
| PV of coupon payments | |||
| P = PMT x (((1-(1 + r) ^- n)) / i) | |||
| Where: | |||
| P = the present value of an annuity stream | To be computed | ||
| PMT = the dollar amount of each annuity payment | $ 7,000 | ||
| r = the effective interest rate (also known as the discount rate) | ((1+5%/2)^2)-1) | 5.0625% | |
| i=nominal Interest rate | 5% | ||
| n = the number of periods in which payments will be made | 10 | ||
| PV of coupon payments= | PMT x (((1-(1 + r) ^- n)) / i) | ||
| PV of coupon payments= | 7000*(((1-(1 + 5.0625%) ^- 10)) / 5%) | ||
| PV of coupon payments= | $ 54,562 | ||
| PV of redemption value= | 100000/(1+5.0625%)^10 | ||
| PV of redemption value= | $ 61,027 | ||
| PV of coupon + redemption= | 54562+61027 | ||
| PV of coupon + redemption= | $ 115,589 | ||
| So the bond price is 115,589 | |||
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