Answer:
Price of bond= $1,065.79
Explanation:
The price of a bond is the present value of the expected interest payments plus the present value of the redemption value(RV)
Price of a bond = PV of Interest payment + PV of RV
PV of Interest payment
Interest payment = 8.25%× 1000 = 82.5
PV of interest payment
PV = A × (1- (1+r)^(-n)/r
A- interests payment, r - yield to maturity, r - year to maturity
A- 82.5, r- 6.875% , n- 6
PV of interest = 82.5× (1-(1.06875)^(-6))/0.06875 = 394.7615956
PV of RV
PV = RV × (1+r)^(-n)
RV - Redemption value, r- yield to maturity, n - year to maturity
PV of RV = 1000 × (1.06875)^(-6) = 671.0320037
Price = 394.76+ 671.03
Price = $1,065.79
Answer:
Price of bond = $1,065.79
Explanation:
Calculating the price of the bond, we use
Price of a bond = PV of Interest payment + PV of RV
Let's calculate the interest payment first as;
Interest payment = 8.25%× 100 = 82.5
PV of interest payment is calculated using this formula
PV = A × (1- (1+r)^(-n)/r
Where
A = interests payment = 82.5
r = yield to maturity = 6.875%
n = year to maturity = 6
Substituting the values, we
PV of interest = 82.5× (1-(1.06875)^(-6))/0.06875
PV of interest = 394.7615956
PV of Redemption value is been calculated using this formula
PV = RV × (1+r)^(-n)
Where ;
RV = Redemption value = 1000
r = yield to maturity = 0.06875
n = year to maturity = 6
Substituting the values in to the formula
PV of Redemption value = 1000 × (1.06875)^(-6)
PV of Redemption value = 671.0320037
Finally
Price of bond = PV of Interest payment + PV of RV
Price of bond = 394.76+ 671.03
Price of bond = $1,065.79
