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Question:

Parsons Inc. is issuing an annual-pay bond that will pay no coupon for the first five years and then pay a 10% coupon for the remaining five years to maturity. The 10% coupon interest for the first five years will all be paid (without additional interest) maturity the annual YTM on this bond is 10%, the price of the bond per $1,000 of face value is closest to:

A $814.
explanation

This bond has no cash flows for the first five years. It then has a $100 cash flow for years 6 through 10. Additionally, the accrued interest ($500) that wasn’t paid in the first five years would have to be paid at the end, along with the principal. A financial calculator using the CF/NPV worksheet can handle this type-of-problem. The required inputs are CF0 = 0, CF1 = 0, F1 = 5, CF2 = 100, F2 = 4, CF3 = 1,600, Fs - 1, NPV, I = 10%, CPT = 813-69. Note that CF3 is made up of the principal ($1,000) plus the remaining $100 coupon plus the accrued interest ($500) that was not paid during the first five years of the bonds life.

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