Assume that a bond makes 10 equal annual payments of $1,000 starting one year fr

Question

Assume that a bond makes 10 equal annual payments of $1,000 starting one year from today.

The bond will make an additional payment of $100,000 at the end of the last year, year 10.

(This security is sometimes referred to as a coupon bond.)

If the discount rate is 3.5$% per annum, what is the current price of the bond?

(Hint: Recognize that this bond can be viewed as two cash flow streams: (1) a 10-year annuity with annual payments of $1,000, and (2) a single cash flow of $100,000 arriving 10 years from today. Apply the tools you've learned to value both cash flow streams separately and then add.)

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

Explanation / Answer

Years Coupon payment Maturity Payment Total Cash Flow Discount factor @3.5% PV of cash flows Year 1          1,000            1,000      0.9662          966.18 Year 2          1,000            1,000      0.9335          933.51 Year 3          1,000            1,000      0.9019          901.94 Year 4          1,000            1,000      0.8714          871.44 Year 5          1,000            1,000      0.8420          841.97 Year 6          1,000            1,000      0.8135          813.50 Year 7          1,000            1,000      0.7860          785.99 Year 8          1,000            1,000      0.7594          759.41 Year 9          1,000            1,000      0.7337          733.73 Year 10          1,000     100,000       101,000      0.7089    71,600.80 Total    79,208.49 So the current Bond price is $79,208.49

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