Question

 Mark​ Goldsmith's broker has shown him two bonds issued by different companies. Each has a maturity of

5

​years, a par value of

​$1,000​,

and a yield to maturity of

8.70 %

  The first bond is issued by Crabbe Waste Disposal and has a coupon interest rate of

6.319​%

paid annually. The second ​ bond, issued by Malfoy​ Enterprises, has a coupon interest rate of

8.80​%

paid annually.

 Calculate the selling price for each of the bonds.

Answer 1

Crabbe Waste Disposal:

Par Value = $1,000

Annual Coupon Rate = 6.319%
Annual Coupon = 6.319% * $1,000
Annual Coupon = $63.19

Time to Maturity = 5 years
Annual YTM = 8.70%

Price of Bond = $63.19 * PVIFA(8.70%, 5) + $1,000 * PVIF(8.70%, 5)
Price of Bond = $63.19 * (1 - (1/1.087)^5) / 0.087 + $1,000 / 1.087^5
Price of Bond = $906.66

Malfoy Enterprises:

Par Value = $1,000

Annual Coupon Rate = 8.80%
Annual Coupon = 8.80% * $1,000
Annual Coupon = $88.00

Time to Maturity = 5 years
Annual YTM = 8.70%

Price of Bond = $88.00 * PVIFA(8.70%, 5) + $1,000 * PVIF(8.70%, 5)
Price of Bond = $88.00 * (1 - (1/1.087)^5) / 0.087 + $1,000 / 1.087^5
Price of Bond = $1,003.92