Answer to Question #241494 in Finance for dssdad

Question

a friend of your just invested in an outstanding bond with a 4% annual coupon and a remaining maturity of 5 years. the bond has a per value og $500 and the market interest rate is currently 7%. how much did your friend pay for the bond? is it par, premium or discount bond?

Answer 1

Annual coupon=$500*4%

=$20

Hence current price=Annual coupon*present value of annuity factor(7%,5)+$500*present value of discounting factor(7%,5)

Present value of annuity=$(\frac{1-(1+interest\ rate)^{-time\ period}}{interest\ rate})$

=$(\frac{1-(1.04)^{-5}}{0.04})$

=4.451822331

Present value of discounting=$\frac{1}{{(1+rate})^{time\ period}}$

=$\frac{1}{1.04^{5}}$

=0.8219271068

Present value =$20*4.451822331+$500*0.8219271068

=$89.03644662+$410.9635534

=$500

It sells at it's face value hence a par bond.