Question

Consider a $1000 bond that pays an annual interest rate of 8% and matures in two years. The prevailing interest rate has dropped to 4%. Choose from the numbers to create the equation that will calculate the current price of this bond. Note that this bond will make two payments. Please place the earlier one on the left side of the plus sign.

Answer 1

Current bond price = 80 / (1+0.04)^1 + 1080 / (1+0.04)^2

Step-by-step explanation:

The Coupon payment = 0.08 * 1000 = 80

The Payment at EOY 1 = 80

The Payment at EOY 2 = 80 + 1000 = 1080

market interest rate = 4%

Current bond price = 80 / (1+0.04)^1 + 1080 / (1+0.04)^2