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23 July, 11:39

XYZ Corporation 10-year bonds paid its annual coupon of $110 yesterday. There are seven (7) annual coupons remaining. The bond has a par value of $1,000. If similar bonds offer a rate of return of 7 percent, how much should these XYZ bonds sell for in the bond market?

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  1. 23 July, 11:49
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    Price of the bond is $1,215.57

    Explanation:

    Price of the bond is actually the present value of all cash flows of the bond. Price of the bond is calculated by following formula:

    Price of the Bond = C x [ (1 - (1 + r) ^-n) / r ] + [ F / (1 + r) ^n ]

    Price of the Bond = $110 x [ (1 - (1 + 7%) ^-7) / 7% ] + [ $1,000 / (1 + 7%) ^7 ]

    Price of the Bond = $592.82 + $622.75

    Price of the Bond = $1,215.57
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