Question

Suppose we have a 3 year coupon bond with a face value of $5,000 that has a coupon rate of 10%. What is the present value of this bond assuming interest rates are 7%?

a.$5.393.6

b.$5,000

c.$4985.2

d.$6,510

Answer 1

7% [Annual interest rate] Aannual Yield to Maturity, RATE # of years to maturity, NPER Annual coupons payments, PMT Bond's Maturity Value at the end, FV Annual coupon type, TYPE Bond's issue price today (Present value of this bond) $500 ($5,000 x 10% --> Coupons are payable on bond's par valueat annual coupon rate) $5,000 [Par value recievable at the end] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. $5,393.6 [Ref: NOTE] --> Option-(a) EXCEL SCREENSHOT: Α. Bond's issue price today is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=7%; nper=3; pmt=-500; fv=-5000; type=0; Here, pmt & fv are negative as they denote cash inflow; type=0 as coupons are paid at the end of each period only. B E F G H I J K 1 Aannual Yield to Maturity, RATE 7% [Annual interest rate] 2 # of years to maturity, NPER 3 Annual coupons payments, PMT =5000*10% ($5,000 x 10% --> Coupons are payable on bond's par valueat annual coupon rate] 4 Bond's Maturity Value at the end, FV $5,000 [Par value recievable at the end] 5 Annual coupon type, TYPE 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. 6 Bond's issue price today =PV(B1,B2,-B3,-B4,B5) [Ref: NOTE] 7 (Present value of this bond)