1. What is the cash flow of a 6% coupon bond that pays interest annually, mature
ID: 2706067 • Letter: 1
Question
1. What is the cash flow of a 6% coupon bond that pays interest annually, matures in 7 years, and has a principle of $1,000?
2. Assuming a discount rate of 8%, what is the price of this bond?
3. Assuming a discount rate of 8.5%, what is the price of the bond?
4. Assuming a discount rate of 7.5%, what is the price of the bond?
What is the cash flow of a 6% coupon bond that pays interest annually, matures in 7 years, and has a principle of $1,000? Assuming a discount rate of 8%, what is the price of this bond? Assuming a discount rate of 8.5%, what is the price of the bond? Assuming a discount rate of 7.5%, what is the price of the bond?Explanation / Answer
1. Annual coupon = 6%*1000 = $ 60
Cashflows in years 1 to 7 are $ 60, $ 60, $ 60, $ 60, $ 60, $ 60, $ 1060 (as the last cashflow includes the payment of principal of $1000 also)
2. Price of bond can be calculated in Excel as =PV(8%,7,-60,-1000), where the first parameter is discount rate of 8%, second parameter is no of years till maturity (7 yrs), third parameter is coupon payment of $60, and the fourth parameter is principal of $1000. This value is $895.87
3. Price of bond can be calculated in Excel as =PV(8.5%,7,-60,-1000), where the first parameter is discount rate of 8.5%, second parameter is no of years till maturity (7 yrs), third parameter is coupon payment of $60, and the fourth parameter is principal of $1000. This value is $872.04
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