Question

Your financial adviser recommends buying a 10-year bond with a face value of $1,000 and an annual coupon of $45. The current interest rate is 5 percent. What might you expect to pay for the bond (aside from brokerage fees)?

Instructions: Enter your response rounded to the nearest penny (two decimal places).

Answer 1

The Price of the Bond

· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

· Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$45]	PMT	45
Market Interest Rate or Yield to maturity on the Bond [5.00%]	1/Y	5
Maturity Period/Time to Maturity [10Years]	N	10
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) will be $961.39.

“Hence, the Price of the Bond will be $961.39”