Bond Pricin g . A General Motors bond carries a coupon rate of 8 percent, has 9 years until maturity, and sells at a yield to maturity of 9 percent
Required
At what price does the bond sell? (Assume annual interest payments.)
The price at which the bond will sell is obtained the present value of all the future cash flows received from the bond. The future cashflow will include a payment of $8 made at the end of each year from year1 to year 9. Also there will be an additional payment of $100 atthe end of year9 which is nothing but the face value of the bond. The process for the calculation of the bond price is given as follows:
Calculation of present value is done as follows:
Present value of future cash flow in year n is given by the formula (cash flow in year n) / (1+yield to maturity)^n
| No. of years | Payment at the end of each year | PV of cash flows |
| 1 | $ 8.00 | $ 7.3394 |
| 2 | $ 8.00 | $ 6.7334 |
| 3 | $ 8.00 | $ 6.1775 |
| 4 | $ 8.00 | $ 5.6674 |
| 5 | $ 8.00 | $ 5.1995 |
| 6 | $ 8.00 | $ 4.7701 |
| 7 | $ 8.00 | $ 4.3763 |
| 8 | $ 8.00 | $ 4.0149 |
| 9 | $ 108.00 | $ 49.7262 |
| Present bond value or bond price | $ 94.0048 |
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