In: Finance
Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 10.0%, and the yield to maturity is 9.5%. What is the bond’s current market price? Answer with 2 decimals ($1,000.00) Please Use Excel.
Solution
Price of bond=Present value of coupon payments+Present value of face value
Price of bond=Coupon payment*((1-(1/(1+r)^n))/r)+Face value/(1+r)^n
Here
Face value =1000
n=number of periods to maturity=10
r-intrest rate per period=YTM=9.5%
Coupon payment=coupon rate *face value=10%*1000=100
Putting values in formula
Price of bond=100*((1-(1/(1+.095)^10))/.095)+1000/(1+.095)^10
Solving we get
Price of bond=1031.39
Using excel
To be calculated PV-Present value
nper-number of periods-10
rate-YTM-9.5%
Type-0(End of period payments)
pmt-Periodic coupon payments-100
fv-Future value-1000
Excel formula
=PV(rate,nper,pmt,fv,type)
Values to be entered
=PV(9.5%,10,100,1000,0) |
Solving we get
PV=Current price of bond=$1031.39