Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell

Price of Bond = $907.766

Explanation:

The price of the bond is the present value of its future cash flow discounted at the required rate of return of 5.5%.

Price of Bond = PV of interest payment + PV of redemption value

PV of interest payment:

interest payment = 5.5% * 1000 = 55

PV = A * (1+r) ^ (-n) / r

A - 55, r - 7%, n - 10 years

PV = 55, r - 5.5%, n - 10

PV = 55 * 1.07^ (-10) / 0.07 = 399.417301

Present Value of redemption

PV = F * (1+r) ^ (-n)

F = 1000, r - 7%, n - 10 years

PV = 1,000 * 1.07^ (-10) = 508.3492921

Price of Bond = 508.3492921 + 399.417301 = 907.7665931

Price of Bond = $907.766