Question

Buner Corp’s outstanding bond has the following characteristics:

                                                Years to maturity                  6.0

                                                Coupon rate of interest    8.0%

                                                Face value                        $1,000

            If investors require a rate of return equal to 12 percent on similar risk bonds and interest is paid semiannually, what should be the market price of Buner’s bond?

Answer 1

Market Price of the Bond

Face Value of the bond = $1,000

Semi-annual Coupon Amount = $40 [$1,000 x 8% x ½]

Yield to Maturity = 6% [12% x ½]

Maturity Period = 12 Years [6 Years x 2]

Market Price of the Bond = Present Value of the Coupon Payments + Present Value of the Face Value

= $40[PVIFA 6%, 12 Years] + $1,000[PVIF 6%, 12 Years]

= [$40 x 8.38384] + [$1,000 x 0.49697]

= $335.35 + $496.97

= $832.32

“Therefore, the market price of Buner’s bond would be $832.32”