Question

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 9% 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. $1,338.48

b. $1,341.32

c. $1,332.80

d. $1,335.64

e. $1,344.16

Answer 1

The price of the bond is computed as shown below:

Annual coupon payment is computed as follows:

= Annual coupon rate x par value

= 9% x $ 1,000

= $ 90

n will be as follows:

= 15 - 1

= 14

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

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

= $ 90 x [ [ (1 - 1 / (1 + 0.055)¹⁴ ] / 0.055 ] + $ 1,000 / 1.055¹⁴

= $ 90 x 9.589647895 + $ 472.5693658

= $ 1,335.64 Approximately

So, the correct answer is option d.

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