Question

Madsen Motors's bonds have 25 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 10%; and the yield to maturity is 12%. What is the bond's current market price? Round your answer to the nearest cent.

Answer 1

Annual Interest payment = Face value * Coupon rate = 1000 * 10% = $100

Yield to maturity (R) = 12%

Years to maturity (T) = 25 years

Price of the bond = Present value of all cash flows arising from the bond

i.e Price of the bond = Present value of all interest payments + Present value of Maturity value at end of maturity period

Price of the bond = [$100 * PVAF(12% , 25 years)] + [$1,000 / (1.12)²⁵]

Price of the bond = [$100 * 8.843139] + [$1,000 * 0.058823]

Price of the bond = $884.3139 + $58.8233

Price of the bond = $943.1372 or

Price of the bond = $943.14  (rounded off to nearest number)