Question

Bond Valuation with Annual Payments

Jackson Corporation's bonds have 9 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds have a yield to maturity of 11%. What is the current market price of these bonds? Do not round intermediate calculations. Round your answer to the nearest cent.

$  

Answer 1

Market price of a bond is calculated using the formula: C1/(1+Y)+C2/(1+Y)^2+...Cn/(1+Y)^n+P/(1+Y)^n; where C1 to Cn are coupon payments, Y is yield to maturity and P is par value of the bond and n is number of years to maturity

From the given info, C1 to Cn is 10% of 1000= 100, Y is 11%, P is 1000 and n is 9.

On substituting, we get

100/1.11+100/1.1^2+.....100/1.11^9+1000/1.11^9

Using present value of annuity formula, (100*(1-(1.11)^-9))/0.11 +1000/1.11^9= 944.63

So, current market price of bond is $944.63