Bond Valuation Based on Discounted Cash Flow

A bond with a face value of $1,000 has a coupon rate of 7% and pays interest annually. It matures in 10 years. If the required rate of return on bonds of similar risk is 5%, what is the value of the bond today?

To calculate the value of the bond, we need to determine the present value of the future cash flows, which include the annual interest payments and the face value at maturity. The formula for the present value of a bond is:

PV = C * (1 - (1 + r)^-n) / r + FV / (1 + r)^n

Where:

• PV = Present Value of the bond
• C = Annual coupon payment
• r = Required rate of return
• n = Number of years to maturity
• FV = Face Value of the bond