Question

What is the present value of the annual interest payments on a 10-year, $1,000 par value bond with a coupon rate of 10 percent paid annually, if the yield on similar bonds is 9 percent?

Answer 1

Answer: $641.77

Explanation:

First find the interest payments:

= Coupon rate * par value

= 10% * 1,000

= $100

The constant payment represents an annuity therefore the present value is that of an annuity.

Present value of an annuity = Annuity * Present value interest factor of annuity, 9% , 10 years

= 100 * 6.4177

= $641.77