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Question 8.1: Calculate the price of a five-year bond that has a coupon of...

Calculate the price of a five-year bond that has a coupon of 6.5 percent paid annually. The current market rate is 5.75 percent.

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The time line and calculations for the five-year bond are as follows:

P_{B}=\frac{C_1}{1+i}+\frac{C_2}{(1+i)^2}+\frac{C_3}{(1+i)^3}+\frac{C_4}{(1+i)^4}+\frac{C_5+F_5}{(1+i)^5}

 

=\frac{\$65}{1.0575}+\frac{\$65}{(1.0575)^2}+\frac{\$65}{(1.0575)^3}+\frac{\$65}{(1.0575)^4}+\frac{\$65+\$1,000}{(1.0575)^5}

 

=\$61.47+\$58.12+\$54.96+\$51.95+\$805.28

 

=1,031.81

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