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A bond with a face value of $10,000 pays interest of 4% per year. This bond will be redeemed at its face value at the end of 10 years. How much should be paid now for this bond when the first interest payment is payable one year from now and a 5% yield is desired? (

Respuesta :

Answer:

$9,228.8

Explanation:

The computation is shown below:

Given that

Bond face value = $10,000

Period = 10 years

Coupon rate or interest rate = 4%

Market rate or yield to maturity = 5%

Based on the above information

The Present value of bond is

= Present value of ordinary annuity + Present value of face value of the bond

Also the interest paid is

= 4% of bond face value

= $400

And, the factor of ordinary maturity table at 5%  it is 7.722

So,

Present value of Annuity is

= $400 ×  7.722

= $3,088.8

And,

Present value of face value of the bond is

= Face value × PV factor

= $10,000 × 0.614 = $6140

So, the present value of bond is

= $3,088.8 + $6,140

= $9,228.8

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