Question

As with most bonds, consider a bond with a face value of $1,000. The bond's maturity is 28 years, the coupon rate is 14% paid annually, and the discount rate is 12%.

What should be the estimated value of this bond in one year?

Answer 1

Price of the bond after 1 year, is the sum of the discounted
value, as at t1, of the maturity value payable at EOY 28
and the discounted value of the 27 annual interest payments.
Here,
the maturity value is $1,000 receivable at EOY 28 and
the 27 annual interest payments constitute an annuity.
27 [28-1] years are taken as the value is to be found out at t1.
Hence, price of the bond after 1 year = 1000/1.12^27+140*(1.12^27-1)/(0.12*1.12^27) =	$        1,158.85