Bond Pricing Question
Hi the following question is from my textbook. Can someone go through it step by step? Thanks!
An 8% bond wit 18 years to maturity has a yield of 9%. What is the price of this bond?
My approach was: Assuming a standard 1000 face value bond.
8% bond -> $80 coupon. Assuming one coupon payment per year. Then plugging into the bond value eqn with c=80, t=18, and r=.09, I get $700.45. However the book's solution was $911.70
You get $700.45 because you only did half of the calculation!!
take into account the face value value of the bond by calculating 1000/(1.09^18) and add that to your answer of $700.45 and you get the correct answer of approx $912.