CC company's bonds mature in 10 years and have a par value of $1000 and an annual coupon payment of $80. Market Interest rate for the bonds is 9%. What is the price of these bonds?
To find the price of the bonds, we can calculate the present value of the future cash flows. The cash flows in this case include the annual coupon payments of $80 and the par value of $1000 that will be received at maturity.
To calculate the present value of the coupon payments, we need to discount each payment using the market interest rate of 9%. The present value of an annuity formula can be used for this calculation, which is:
Present Value of Coupon Payments = Coupon Payment × [(1 - (1 + Interest Rate)^(-Number of Periods)) / Interest Rate]
Plugging in the values, we can calculate the present value of the coupon payments:
Coupon Payment = $80
Interest Rate = 9% or 0.09
Number of Periods = 10 years
Present Value of Coupon Payments = $80 × [(1 - (1 + 0.09)^(-10)) / 0.09]
Next, we need to calculate the present value of the par value when it is received at maturity. This can be done using the present value formula, where the future value is the par value of $1000, and the number of periods is 10 years. We will also discount this value using the market interest rate of 9%.
Present Value of Par Value = Par Value / (1 + Interest Rate)^Number of Periods
Plugging in the values, we can calculate the present value of the par value:
Par Value = $1000
Interest Rate = 9% or 0.09
Number of Periods = 10 years
Present Value of Par Value = $1000 / (1 + 0.09)^10
Finally, we can calculate the price of the bonds by summing up the present values of the coupon payments and the par value:
Price of Bonds = Present Value of Coupon Payments + Present Value of Par Value
By calculating these values, we can find the price of the bonds.