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Chapter 4: Q.15 (page 134)

Calculate the present value of a $1,300 discount bond with seven years to maturity if the yield to maturity is 8%.

Short Answer

Expert verified

The present value of bond is $758.53

Step by step solution

Step 1. Introduction

A bond's present value is determined by discounting future cash payments by the current market interest rate.

Step 2. Explanation

The present value of bond is calculated as:

$P V = \frac{F V}{(1 + r)^n} = \frac{1300}{(1 + 0.08)^7} = 758.53$

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Most popular questions from this chapter

If mortgage rates rise from 5% to 10% but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses?

If interest rates decline, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk?

Would $200, which is to be received in exactly one year, be worth more to you today when the interest rate is 12% or when it is 17%?

Do bondholders fare better when the yield to maturity increases or when it decreases? Why?

Consider a bond with a 6% annual coupon and a face value of $1,000. Complete the following table. What relationships do you observe between years to maturity, yield to maturity, and the current price?