Question

Fresh Water, Inc. sold an issue of 13-year $1,000 par value bonds to the public. The bonds have a 11.93 percent coupon rate and pay interest annually. The current market rate of interest on the Fresh Water, Inc. bonds is 11.24 percent. What is the current market price of the bonds?

Answer 1

Given

Par value = $ 1000

Coupon Rate = 11.93%

Coupon Amount = $ 1000*11.93% = $ 119.3

Market Rate of interest = 11.24%

Term = 13 years

We know that Present value of the cash inflows at Market rate of interest gives the Market price of the Bond.

Year	Cash flow	Disc @ 11.24	Discounting Factor	Discounted Cash flow
1	$119.30	1/(1.1124)^1	0.8990	$107.25
2	$119.30	1/( 1.1124)^2	0.8081	$96.41
3	$119.30	1/( 1.1124)^3	0.7265	$86.67
4	$119.30	1/( 1.1124)^4	0.6531	$77.91
5	$119.30	1/( 1.1124)^5	0.5871	$70.04
6	$119.30	1/( 1.1124)^6	0.5278	$62.96
7	$119.30	1/( 1.1124)^7	0.4744	$56.60
8	$119.30	1/( 1.1124)^8	0.4265	$50.88
9	$119.30	1/( 1.1124)^9	0.3834	$45.74
10	$119.30	1/( 1.1124)^10	0.3447	$41.12
11	$119.30	1/( 1.1124)^11	0.3098	$36.96
12	$119.30	1/( 1.1124)^12	0.2785	$33.23
13	$1,119.30	1/( 1.1124)^13	0.2504	$280.26
		Total		$1,046.02

Hence the Market Price of the Bond is $ 1046.02 .

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