Assume that a bond makes 10 equal annual payments of $1,000 starting one year from today. The bond will make an additional payment of $100,000 at the end of the last year, year 10. (This security is sometimes referred to as a coupon bond.) If the discount rate is 3.5$% per annum, what is the current price of the bond? (Hint: Recognize that this bond can be viewed as two cash flow streams: (1) a 10-year annuity with annual payments of $1,000, and (2) a single cash flow of $100,000 arriving 10 years from today. Apply the tools you've learned to value both cash flow streams separately and then add.)

Based on the information given, the current price of the bond will be $71721.66

The current price of the bond is calculated thus:

Also for 10 years, the discounted cash flow will be:

= $100000 × 0.7089 = $70890

The current bond price will be:

= $70890 + $831.66

= $71721.66

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$79,208.48

Explanation:

The computation of the current price of the bond is shown below:-

Number of    Cash flow    PV annuity factor    Discounted cash

years                                                                        flow

1 -10  years     $1,000                 8.3166                      $8,316.6

10 years        $100,000            0.7089188                $70,891.88

Current price of the bond                                        $79,208.48

Refer to the PV annuity factor so that we get to know the discounting factor value.

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