Dexter Mills issued a 25-year bonds two years ago at a coupon rate of 10.2 percent....

Dexter Mills issued a 25-year bonds two years ago at a coupon rate of 10.2 percent. The bonds make semiannual payments. The yield-to-maturity on these bonds is 9.2 percent. What is the current bond price?

I got $5316.51, but I am unsure of my answer so would like confirmation + see the work to get the answer. Thanks!

Solutions

Expert Solution

Current Price of the Bond

The Current 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 = $51 [$1,000 x 10.20% x ½]

Semi-annual Yield to Maturity = 4.60% [9.20% x ½]

Maturity Period = 46 Periods [(25 Years – 2 Years) x 2]

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

= $51[PVIFA 4.60%, 46 Years] + $1,000[PVIF 4.60%, 46 Years]

= [$51 x 18.99260] + [$1,000 x 0.12634]

= $968.02 + $126.34

= $1,094.96

“Hence, the Current Price of the Bond will be $1,094.96”

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 11 months ago

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