National steel 15-year, $1,000 par value bonds pay 8 percent interest

The value of the National Steel 15-year, $1,000 par value bond with an 8 percent annual interest rate and a market price of $1,085 to you given your required rate of return at 10 percent can be determined by using the “present value” formula. The present value formula is used to calculate the current discounted worth of future cash flows. To determine the present value we must first calculate the future cash flows (in this case eight annual payments of $80) and then discount them back at our required rate of return (10%).

Assuming that all payments are received at the end of each year:

First payment = 1000 + 80 = 1080; Second payment = 1080 + 80 = 1160; Third Payment = 1160 + 80 = 1240; Fourth Payment=1240+80=1320; Fifth Payment=1320+80=1400; Sixth Payment=1400+80=1480; Seventh Payment=1480+80=1560 and Eighth & Final Payment will be 1560+80=$1640

Now we need to apply Present Value Formula as follow:PV=(Future Cash Flows/(1+Required Rate Of Return)^n); where n stands for number if years or period.

In above example, PV=[(1000+(1080+(1160+(1240+(1320+(1400+ (1480+(1560))))))/((1+.10)^15)]=$819.22

Therefore, according to present value calculation method National Steel 15-year Bond’s Value with 8% coupon rate and a market price of $1085 is estimated around 819.22 which shows that it has very less chance to generate any capital gains for its investors because its estimated valu is much lower than its actual market price i.e., 1085$.