A bond with face value of $1,000 has a current yeild of 7 percent and a coupon rate of 8 percent. What is the bond's price?
To determine the bond's price, we need to calculate the present value of its future cash flows. First, let's clarify a few terms:
- Face value: This is the nominal value of the bond, which is $1,000 in this case.
- Coupon rate: This is the annual interest rate that the bond pays. Here, it is 8 percent, which means the bond pays $80 ($1,000 * 0.08) in interest each year.
- Current yield: This is the annual return on investment relative to the bond's current market price. In this case, it is given as 7 percent.
Current yield is calculated as the coupon payment divided by the bond's price. Rearranging the formula, we can find the bond's price.
Let's calculate the bond's price using the formula:
Bond price = Coupon payment / Current yield.
Coupon payment = Face value * Coupon rate
= $1,000 * 0.08
= $80.
Bond price = $80 / 0.07
= $1,142.86.
Therefore, the bond's price is approximately $1,142.86.