Calculate the price at the beginning of year 1 of an 8% annual coupon bond with face value $1,000 and 5 years to maturity.
A)$1,105.47
B)$1,131.91
C)$1,084.25
D)$1,150.01

Question

Calculate the price at the beginning of year 1 of an 8% annual coupon bond with face value $1,000 and 5 years to maturity.
A)$1,105.47 
B)$1,131.91 
C)$1,084.25 
D)$1,150.01

Quizplus · Accepted Answer

To calculate the price of the bond, we need to discount the future cash flows to present value. The annual coupon payment is 8% * $1,000 = $80. In addition, at the end of the 5th year, we receive the face value of $1,000. The discount rate is not provided, so we assume it to be the market rate of 8%.
Using the formula for present value of an annuity and present value of a lump sum:
PV(Coupon payments) = $80 * (1 - 1/(1+0.08)^5)/0.08 = $329.96
PV(Face value) = $1,000/(1+0.08)^5 = $680.29
Total bond price = $329.96 + $680.29 = $1,010.25
Therefore, the correct answer is C.

Calculate the Price at the Beginning of Year 1 of an 8