Finance

The formula for valuing a bond is:

P0="t"1nIi (1+i) t+PVn (1+i) n=Presentvalueofcouponpayments+Presentvalueofbond'sparvalue

In the scenario given, n=10 in order to get a value of $1,277.98. This price is at a premium, meaning above the par value. Bonds are price above par value when the interest rate on the bond is higher than the interest rate in the market. When the rate in the market is higher than the coupon rate on the bond, the bond will have a price below par value. So in this case, with the price of the bond being $1,277.98, that assumes that for the next ten years, this bond is going to pay a rate higher than what the market rate is at present. Because the bond holder is receiving a premium, the bondholder must pay for that premium. This can present a problem for the bond holder, in that they will receive back...
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