Answers
| Current Price is the sum of the Present Values of |
| 1. all future coupons on the bond ,till maturity |
| 2. Face value to be received at maturity |
| both discounted at the market interest rate which is the yield on the bond |
| based on which the investor will fix the price(as above) |
| So, |
| Current price/PV=(Pmt.*(1-(1+r)^-n)/r)+(FV/(1+r)^n) |
| where , |
| Pmt.=Annual coupon payment,ie. 1000*5%=50 ; |
| r=Market interest rate or Yield or Yield to maturity, ie. 5.5% or 0.055 |
| n= No.of coupon -periods still pending to maturity, ie. 14 |
| FV= Face Value,ie. 1000 |
| Substituting the numerical values in the above formula, |
| Current price/PV=(50*(1-(1+0.055)^-14)/0.055)+(1000/(1+0.055)^14)= |
| 952.05 |
| So, |
| ANSWER: b. $ 952.05 |
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