Morin company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. the market requires an interest rate of 6.1% on these bonds. what is the bond's price?

a. $1,147.71

b. $1,280.93

c. $1,024.74

d. $1,096.47

e. $1,116.97

The answer is: C

Explanation:

A bond is a financial instrument issued where the issuer has to make periodic payments  of interest and repay the initial sum loaned at maturity date (when the total amount owed has to be repaid). The price of a bond is the present value of all anticipated future cash flows. It includes the present value of coupon payments and the value at maturity date. In order to compute a Morin company's bond price, the present values of all future cash flows must be computed as follows:

Bond price (P) = sum of: C/(1 + y)^t + F/(1+y)^T

where:

C is the coupon payment per period ($65)

y is the coupon rate or interest rate (6.1% / 0.061)

t is time period

F is the bond's face value at maturity date ($1000 + $65)

T is the number of periods to maturity (8 years)

Year 1:  65/(1.061)^1 = $61.26295947

Year 2:  65/(1.061)^2 = $57.74077236

Year 3:  65/(1.061)^3 = $54.42108611

Year 4:  65/(1.061)^4 =  $51.29225835

Year 5:  65/(1.061)^5 =  $48.34331607

Year 6:  65/(1.061)^6 =  $45.56391712

Year 7:  65/(1.061)^7 =  $42.94431397

Year 8:  1065/(1.061)^8 = $663.1725423

The total of all the present values from Year 1 to Year 8 is $1,024.74

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