Determine the current market prices of the following $1,000 bonds if the comparable rate is 10% and answer the questions. XY 5 ¼ percent, with interest paid annually for 20 years. AB 14 percent, with interest paid annually for 20 years. Which bond?

1 Answers

Oddman Profile
Oddman answered
At the comparable rate (10%), the present value of the $1000 maturity value of the bond is 1000*(1.10^-20) = 148.6436

Each bond makes an annual payment of the bond rate times the face value. For bond XY, that is $52.50, For bond AB, that is $140. At the comparable rate (10%), the present value of the series of payments is the payment value times
  (1 - (1.10^-20))/.1 = 8.5135637

Your 5.25% bond (XY) has a value of
  148.6436 + 52.50*8.5135637 = 148.6436 + 446.9621 = 595.6057
  ≈ $595.61
Your 14% bond (AB) has a value of
  148.6436 + 140*8.5135637 = 148.6436 + 1191.8989 = 1340.5425
  ≈ $1340.54 _____
An on-line bond calculator can be found here.

Answer Question

Anonymous