Answer :
Answer:
What is the appropriate price today if interest rate (or discount rate) is 12%?
The answer is: $927.85
Explanation:
Face value of bond = $1,000
Years = 5
Coupon = 10%
Yield = 12%
Step 1:
Calculate the price of the bond from the following formula:
Bond price = C × [tex]\frac{1 - (1+r)^{-n} }{r} + \frac{f}{(1+r)^{n} }[/tex]
Where:
C = coupon payment + interest
r = rate of interest + (yield or discount rate)
n = number of period
f = fair value of the bond
Step 2:
Calculate the coupon payment
Coupon payment = $1,000 × 10/100
Coupon payment = $100
Step 3:
Calculate the bond price with the formula given in the step 1:
Bond price = C × [tex]\frac{1 - (1+r)^{-n} }{r} + \frac{f}{(1+r)^{n} }[/tex]
Bond price = $100 × [tex]\frac{1 - (1+0.12)^{-5} }{0.12} + \frac{1,000}{(1+0.12)^{5} }[/tex]
Bond price = $927.85 (answer)