Answer:
The answer is: C
Explanation:
A bond is a financial instrument issued where the issuer has to make periodic payments of interest and repay the initial sum loaned at maturity date (when the total amount owed has to be repaid). The price of a bond is the present value of all anticipated future cash flows. It includes the present value of coupon payments and the value at maturity date. In order to compute a Morin company's bond price, the present values of all future cash flows must be computed as follows:
Bond price (P) = sum of: C/(1 + y)^t + F/(1+y)^T
where:
C is the coupon payment per period ($65)
y is the coupon rate or interest rate (6.1% / 0.061)
t is time period
F is the bond's face value at maturity date ($1000 + $65)
T is the number of periods to maturity (8 years)
Year 1: 65/(1.061)^1 = $61.26295947
Year 2: 65/(1.061)^2 = $57.74077236
Year 3: 65/(1.061)^3 = $54.42108611
Year 4: 65/(1.061)^4 = $51.29225835
Year 5: 65/(1.061)^5 = $48.34331607
Year 6: 65/(1.061)^6 = $45.56391712
Year 7: 65/(1.061)^7 = $42.94431397
Year 8: 1065/(1.061)^8 = $663.1725423
The total of all the present values from Year 1 to Year 8 is $1,024.74
The price of the bond is $1,024.74.
A bond refers to a fixed income instrument that generally represents a loan given by the holder to the issuer. They are repaid after a fixed period at a fixed rate of interest.
The formula to calculate the price of the bond is:
[tex]\rm Bond\: Price =C\times \dfrac{(1-(1+r)^{-n}}{r} +\dfrac {F}{(1+r)n}[/tex]
Where C is the coupon interest paid periodically, r is Yield to maturity (YTM) or interest, n is the number of periods till maturity, and F is the Face / Par value of the bond.
Given:
n is 8 years
F is $1,000+$65
C is $65
r is 6.1%
Therefore the price of a bond will be:
[tex]\rm Bond\: Price =65\times \dfrac{1-(1+0.061)^{-8}}{r} +\dfrac {1065}{(1+0.061)8}\\\\\rm Bond\: Price = $1,024.74[/tex]
Therefore the correct option is c.
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