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Homework answers / question archive / A friend of yours wants to invest in an outstanding bond with a 5% annual coupon and a remaining maturity of 10 years
A friend of yours wants to invest in an outstanding bond with a 5% annual coupon and a remaining maturity of 10 years. The bond has a par value of $1,000, and the market interest rate is currently 7%. How much should your friend pay for the bond? Based on the price you calculate, is the bond a par, premium, or discount bond?
Bond Price = C* (1-(1+r)^-n/r ) + F/(1+r)^n
C = Periodic coupon payment = 1000*5% = $50
F= Face / Par value of bond = $1000
r= Yield to maturity (YTM) = 7%
n= No. of periods till maturity = 10 year
Bond price = 50* (1-(1+.07)^-10/.07 + 1000/(1+.07)^10
= $351.18 + $508.35 = $859.53
Amount should paid by friend = $859.53
The bond is discount bond , because bond currently trading for less than its par value
