Question:
Zevon, inc. has 9% coupon bonds on the market that have 8 years left to maturity. The bonds make annual payments. If the Yield to maturity on these bonds is 7%, what is the current bond price?
The answer is $1119.43 but i have no idea how to get this answer? can someone guide me in the right direction on how to solve this question. Thanks.
Assume PAR value: $1,000
Price of the bond = sum of discounted cash flows from the bond
The rate to discount with: 7%
Cash flows:
Cf1=90 (9% out of $1,000)
Cf2=90
Cf3=90
...
Cf7=90
CF8=1090
Price = SUM( CFi/(1+0.07)^i) when i = 1..8
Price = $1,119.426
Enjoy...