Question

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 10.5%. The bonds have a yield to maturity of 11%. What is the current market price of these bonds? Round your answer to the nearest cent.

Answer 1

Solution:
	Current market price of these bonds	$981.52
	(Bond price )
Working Notes:
	Bond Price = Periodic Coupon Payments x Cumulative PVF @ periodic YTM (for t= to t=n) + PVF for t=n @ periodic YTM x Face value of Bond
	Coupon Rate = 10.5 %
	Annual coupon = Face value of bond x Coupon Rate = 1,000 x 10.5 % = $105
	YTM= 11%   p.a (annual)
	n= no.of coupon = No. Of years x no. Of coupon in a year
	= 5 x 1 = 5
	Bond Price = Periodic Coupon Payments x Cumulative PVF @ periodic YTM (for t= to t=n) + PVF for t=n @ periodic YTM x Face value of Bond
	= $105 x Cumulative PVF @ 11% for 1 to 5th + PVF @ 11% for 5th period x 1,000
	= 105 x 3.695897018 + 1000 x 0.593451328
	=$981.5205149
	=$981.52
Cumulative PVF @ 11 % for 1 to 5th is calculated = (1 - (1/(1 + 0.11)^5) ) /0.11 = 3.695897018
PVF @   11% for 5th period is calculated by = 1/(1+i)^n = 1/(1.11)^5 = 0.593451328
By Excel Method or financial calculator
	Annual coupon = Face value of bond x Coupon Rate = 1,000 x 10.5 % = -$105 = PMT
	YTM= 11%   p.a (annual)   = rate
	n= no.of coupon = No. Of years x no. Of coupon in a year = 1 x 5 = 5 = nper
	PV= price of the bond = ??
	FV= par value of bond = 1000
By typing in excel below formula
	=pv(rate,nper,pmt,fv)
	=pv(11%,5,105,1000)
	$981.52
	hence price of the bond is $981.52
Please feel free to ask if anything about above solution in comment section of the question.