Question

Morin Company's bonds mature in 10 years, have a par value of $1,000, and make an annual coupon interest payment of $60. The market requires an interest rate of 8.0% on these bonds. What is the bond's price

Answer 1

= $865.79

Step-by-step explanation:

The value of the bond is the present value (PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

Value of Bond = PV of interest + PV of RV

The value of bond of Morin Company can be worked out as follows:

Step 1

PV of interest payment

PV = A × (1-(1+r)^(-n))/r

r- 8%, n- 10, A- interest payment = 60

PV of interest

= 60× (1- (1+0.08)^(-10)/0.08

= 402.60

Step 2

PV of Redemption Value

PV = RV × (1+r)^(-n)

= 1,000 × (1.08)^(-10)

= $463.193

Step 3

Price of bond

= $536.80 + 463.19

= $865.79