9 Weatherhead Bakery is issuing a bond with 10 year maturity and annual coupon payments of $80. The yield to maturity of this bong (think of it as the "return") is 8%. In 10 years, Weatherhead Bakey will pay $1,000 to the owner of the bond. The cash flows from the bond are presented below. What would be the fair value of this bond if you wanted to buy it today? Year 0 Coupon Face Value 1 + $80 2 + $80 3 + $80 4 + $80 5 + $80 6 + $80 7 + $80 8 + $80 9 + $80 10 H $80 $1,000 $1,080
9 Weatherhead Bakery is issuing a bond with 10 year maturity and annual coupon payments of $80. The yield to maturity of this bong (think of it as the "return") is 8%. In 10 years, Weatherhead Bakey will pay $1,000 to the owner of the bond. The cash flows from the bond are presented below. What would be the fair value of this bond if you wanted to buy it today? Year 0 Coupon Face Value 1 + $80 2 + $80 3 + $80 4 + $80 5 + $80 6 + $80 7 + $80 8 + $80 9 + $80 10 H $80 $1,000 $1,080
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
How do you answer this question about the fair value of the bond?
Detailed answer would be appreciated.
Transcribed Image Text:9 Weatherhead Bakery is issuing a bond with 10 year maturity and annual coupon payments of $80. The yield to maturity of this bong (think of it as the "return") is 8%.
In 10 years, Weatherhead Bakey will pay $1,000 to the owner of the bond. The cash flows from the bond are presented below.
What would be the fair value of this bond if you wanted to buy it today?
2
Year
Coupon
Face Value
0
1
+
$80
$80
3
+
$80
4
$80
5
$80
6
+
$80
+
$80
8
+
$80
9
$80
10
1
$80
$1,000
$1,080
Expert Solution
Step 1
A bond is a debt instrument where a loan (in the form of bond price) is received by a company, which is then repaid along with interest (in the form of coupons and face value).
The fair price of a bond is the price determined by the market trends without any bias and freely accepted by all the concerned parties.
Step by step
Solved in 2 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education