1.

Write the equation expressing the present value (or price) of bound that has an 8
% coupon (annual payment), a four-year maturing and a principal of $1000 if
yields on similar securities are 10%. Compute the price?

Coupon Payment = $1,000 8% = $80

1
1-
Price = (1.10) 4 1
($80 ) + ($1, 000 )
0.10 (1.10) 4

2. find the price of a corporate bond maturing in five years that has a 5% coupon
(annual payment), a $1000 face value and an AA rating. A local newspapers
financial section reports that the yields on 5 year bonds are AAA6%, AA 7%, A
8%.

Coupon Payment = $1,000 5% = $50

Since Bond has an AA rating, then Market Yield = 7%

1
1-
Price = (1.07)5 1
($50 ) + ($1, 000 )
0.07 (1.07)5

= ($50 4.1002 ) + ($1,000 0.712986)

= $205.01 + $712.986

= $917.996 $918