Question

Madsen Motors's bonds have 18 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 6.5%; and the yield to maturity is 13%. What is the bond's current market price? Round your answer to the nearest cent. $

Answer 1

Face value or par value of the bond = $1000

The bond pays coupons annually

Annual interest rate = 6.5%

Annual coupon payment = Annual interest rate*Face value = 6.5%*1000 = 65

Time to maturity = 18 years

Yield to maturity = 13%

Method 1: Bond's price calculation using ba ii plus calculator

Input the following values in ba ii plus calculator

N = 18

I/Y = 13

PMT = 65

FV = 1000

CPT -> PV [Press CPT and then press PV]

We get, PV = -555.4061561

Current market price of the bond = $555.41 (Rounded to the nearest cent)

Answer -> 555.41

Method 2: Bond's price calculation using Excel

We can compute the price of the bond using the PV function in Excel as shown below:

=PV(13%,18,65,1000) = -555.41

Current market price of the Bond = $555.41

Answer -> 555.41