One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 5.2% annual coupon bonds at their...

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 5.2% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

Solutions

Expert Solution

Current Price of the Bond

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value. The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

Here, the calculation of the Bond Price using financial calculator is as follows


Variables	Financial Calculator Keys	Figures

Face Value [-$1,000]	FV	-1,000
Coupon Amount [$1,000 x 5.20%]	PMT	52
Market Interest Rate or Required Rate of Return [5.50%]	1/Y	5.50
Time to Maturity [14 Years]	N	14
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $971.23.

“Hence, the Current Price of the Bond will be $971.23”

ekkarill92 answered 1 month ago

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