Question

Tinker Corp.’s outstanding bond has a coupon rate of 8 percent and a face value of $1000. The bond matures in six years. Investors require a rate of return equal to 12 percent and interest is paid semiannually. What should be the market price of Tinker’s bond?

Answer 1

Market price of Tinker’s bond

The Market Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = $1,000

Semi-annual Coupon Amount = $40 [$1,000 x 8% x ½]

Semi-annual Yield to Maturity = 6% [12% x ½]

Maturity Period = 12 Years [6 Years x 2]

The Market Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $40[PVIFA 6%, 12 Years] + $1,000[PVIF 6%, 12 Years]

= [$40 x 8.38384] + [$1,000 x 0.49697]

= $335.35 + $496.97

= $832.32

“Therefore, the market price of Tinker’s Bond = $832.32”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.  

--The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.