Question

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 8.7% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

Select the correct answer.

a. $1,306.87

b. $1,312.83

c. $1,315.81

d. $1,318.79

e. $1,309.85

Answer 1

The price of the bond is computed as shown below:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)ⁿ ] / r ] + Par value / (1 + r)ⁿ

Coupon payment is computed as follows:

= Par value x coupon rate

= $ 1,000 x 8.7%

= $ 87

So, the price of the bond will be computed as follows:

= $ 87 x [ [ (1 - 1 / (1 + 0.055)¹⁴ ] / 0.055 ] + $ 1,000 / 1.055¹⁴

= $ 87 x 9.589647895 + $ 472.5693658

= $ 1,306.87 Approximately

So, the correct answer is option a.

Feel free to ask in case of any query relating to this question