A company has issued a bond having a face value of ₹10,000 paying annual dividends at 8.5%. The bond will be redeemed at par at the end of 10 years, then the purchase price of this bond if the investor wishes a yield of 8% is : [Given $(1.08)^{-10}= 0.46319349]$
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → ₹10,335.50
The present value of the annual coupon payments (PV)
$PV_{coupons}$ = Coupon payment × $\frac{1-(1+r)^{-n}}{r}$
$=850×\frac{1-(1+0.08)^{-10}}{0.08}$
$≃5,715.625$
$PV_{fave\,value} =\frac{fave\,value}{(1+r)^n}=\frac{10000}{(1+0.08)^{10}}$
$≃4,630.93$
Purchase Price = $PV_{coupons}+PV_{fave\,value}$
$≃10,335.50$