Andres needs a new computer, but did not have enough money to purchase one so he borrowed the $1,800 he needed to make the purchase from a relative. He agreed to pay the loan back by making annual payments over the next two years. Assuming an interest rate of 4 percent, how much is each payment?

The market price will be $880.57

Explanation:

Interest amount for each year till 8 years will be $50 (1000*5%). Interest rate will be applied on par value. The cashflows of 8 years on account of interest and principal amount of $1000 would be discounted at 7%.

Working:

P.V of interest by using annuity formula:

$50 * (1-(1+7%)^-8)/7% = $298.57

P.V of principal amount : $1000 * (1+7%)^-8 = $582

Current price of bond = $298.57 + $582 = $880.57