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One of IBM's bond issues has an annual coupon rate of 3.6%, a face value of...

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One of IBM's bond issues has an annual coupon rate of 3.6%, aface value of $1,000 and matures in 9 years.
What is the value (or price) of the bond if the required returnis 5%?

Answer & Explanation Solved by verified expert

3.6 Ratings (266 Votes)

Calculation of price of bond:
Particulars	Time	PVf @5%	Amount	PV
Cash Flows (Interest)	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.9524	Â Â Â Â Â Â Â Â 36.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 34.29
Cash Flows (Interest)	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 2.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.9070	Â Â Â Â Â Â Â Â 36.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 32.65
Cash Flows (Interest)	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 3.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.8638	Â Â Â Â Â Â Â Â 36.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 31.10
Cash Flows (Interest)	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 4.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.8227	Â Â Â Â Â Â Â Â 36.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 29.62
Cash Flows (Interest)	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 5.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.7835	Â Â Â Â Â Â Â Â 36.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 28.21
Cash Flows (Interest)	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 6.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.7462	Â Â Â Â Â Â Â Â 36.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 26.86
Cash Flows (Interest)	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 7.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.7107	Â Â Â Â Â Â Â Â 36.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 25.58
Cash Flows (Interest)	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 8.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.6768	Â Â Â Â Â Â Â Â 36.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 24.37
Cash Flows (Interest)	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 9.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.6446	Â Â Â Â Â Â Â Â 36.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 23.21
Cash flows (Maturity Amount)	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 9.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.6446	Â Â 1,000.00	Â Â Â Â Â Â Â Â Â Â Â Â Â 644.60
Fair Price				Â Â Â Â Â Â Â Â Â Â Â Â Â 900.48
Price of bond is $900.48

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