Question

Guggenheim, Inc. offers a 6.1% coupon bond with annual payments. The yield to maturity is 5.85% and the maturity date is 9 years. What is the market price of a $920 face value bond?

Select one:

a. 1150.97

b. 758.89

c. 935.75

d. 701.81

e. 1050.03

Answer 1

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 = $920

Annual Coupon Amount = $56.12 [$920 x 6.10%]

Yield to Maturity = 5.85%

Maturity Period = 9 Years

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

= $56.12[PVIFA 5.85%, 9 Years] + $920[PVIF 5.85%, 9 Years]

= [$56.12 x 6.84632] + [$920 x 0.59949]

= $384.22 + $551.53

= $935.75

“Therefore, the Market Price of the Bond would be (c). $935.75”

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.