Calculate the present value of the bond

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Reference no: EM13815625

The Apple company issues a coupon bond with the face value $1000, the coupon rate 7% and the maturity 10 years.

(1) If the interest rate is assumed to be fixed at 8%, what is the present value of the bond?

(2) Instead, people expect that the interest rate will be fixed at 8% until the end of the 5th year (immediately after the 5th coupon payment) and will either jump to 10% or fall to 5% afterwards with equal chances. Calculate the present value of the bond. Hint: Find the value at the end of the 5th year and then the present value.

Reference no: EM13815625

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