A company currently offer $1,000 par value bonds that pay 9% interest. The current yield to...

A company currently offer $1,000 par value bonds that pay 9% interest. The current yield to maturity is 12%. What is the current price of the bonds if some mature in 5 years and some mature in 10 years?

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Solutions

Expert Solution

Current Price of the Bond if the Maturity Period is 5 Years

Par Value of the bond = $1,000

Annual Coupon Amount = $90 [$1,000 x 9%]

Yield to Maturity = 12%

Maturity Period = 5 Years

Current Price of the Bond = Present Value of the Coupon Payments + Present Value of the Face Value

= $90[PVIFA 12%, 5 Years] + $1,000[PVIF 12%, 5 Years]

= [$90 x 3.60478] + [$1,000 x 0.56743]

= $324.43 + $567.43

= $891.86

“Current Price of the Bond for 5 years maturity period would be $891.86”

Current Price of the Bond if the Maturity Period is 10 Years

Par Value of the bond = $1,000

Annual Coupon Amount = $90 [$1,000 x 9%]

Yield to Maturity = 12%

Maturity Period = 10 Years

Current Price of the Bond = Present Value of the Coupon Payments + Present Value of the Face Value

= $90[PVIFA 12%, 10 Years] + $1,000[PVIF 12%, 10 Years]

= [$90 x 5.65022] + [$1,000 x 0.32197]

= $508.52 + $321.97

= $830.49

“Current Price of the Bond for 10 years maturity period would be $830.49”

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.

jeff jeffy answered 1 year ago

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