Question

1. Jackson Corporation's bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9.5%. The bonds have a yield to maturity of 10%. What is the current market price of these bonds? Round your answer to the nearest cent.

2. Heath Food Corporation’s bonds have 22 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 7%. They pay interest annually and have a 8% coupon rate. What is their current yield? Round your answer to two decimal places.

Answer 1

Bond Valuation: The value of bond is the present value of the expected cashflows from the bond,discounted at Yield to Maturity(YTM).

Question 1

Year	Cash flow ($)	PVF @10%	Present Value(Cash flow*PVF)
1	95	0.909	86.36
2	95	0.826	78.47
3	95	0.751	71.35
4	95	0.683	64.89
5	1095	0.621	680.00

Current Market Price of Bonds = $981.07 (86.36+78.47+71.35+64.89+680)

Question 2

Step 1: Calculation of Current market price

Year	Cash flow ($)	PVF/PVAF @7%	Present Value(Cash flow*PVF/PVAF)
1-22	80	11.0612	884.90
22	1000	0.2257	225.70

Current Market Price of Bonds = $1110.60 (884.90+225.70)

Step 2: Calculation of Current Yield

Current Yield can be calculated as

(Interest / Current market price) *100

(80 / 1110.60) *100

7.20 %