How do you calculate the purchase price of bonds? Please help with finance problem. Interest rate help.i?

So the example below is taken from my notes, I study finance but have some difficulties understanding this bond price thing. It sort of provided the answer already but can someone please elaborate on it for me??? Thanks in advance.

Setting

Face amount : $100000

Purchase date: January 1,2005

Maturity date January 1,2010

Interest paid: July 1st and January 1st

Coupon (stated) rate oif interest: 8%

Markey (effective) rate of interest: 10%

What is the approxiate purchase price?

PVa of ($100000 X 4%) (n=10, i=5%) +

PV of $100000 (n=10, i=5%)

Purchase price is approximately $92278

1 Answer

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  • 1 decade ago
    Favorite Answer

    A bond is calculated based on the face value of the amount at maturity discounted to the present value that the bond is worth today.

    In your example the bond is a 5 year bond, and is worth 100k five years from 1.1.05. Calculate the PV of the bond for years @ 8% . This will tell you the value of the bond originally.

    Then look at what it would be worth PV based on the same variables back to present time period of today. This will tell you how much the bond has gained in interest. Which is what you are earning throughout the life of th bond.

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