Question

Please explain step by step.

The 4.5 percent bond of JL Motors has a face value of $1,000, a maturity of 7 years, semiannual interest payments, and a yield to maturity of 6.23 percent. What is the current market price of the bond?

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).

Year	Cash flow	PVAF/[email protected]%	Present Value (Cashflow*PVAF/PVF)
1-14	22.5	11.2080	252.18
14	1000	0.6509	650.90

Current Market Price of Bonds = $903.08 (252.18+650.90)

Note : Since the bond makes semiannual interest payments, total no. of period is 14 (7*2), cashflow per period is 22.50(1000*4.5%/2) and cashflows are discounted at 3.115% (6.23/2).