Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond

Price of Bond = $1,147.201

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 for Morgan can be worked out as follows:

Step 1

PV of interest payments

PV of interest =

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

A - interest payment - 80, r-yield on bond - 6%, n-years to maturity - 10

80 * (1 - (1.06) ^ (-10)

= 588.8069

Step 2

PV of Redemption Value

= 1,000 * (1.06) ^ (-10)

= 558.3947769

Price of bond

= 588.80 + 558.394

Price of Bond = $1,147.201