Question

Madsen Motors's bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 11%, and the yield to maturity is 12%. What is the bond's current market price? Round your answer to the nearest cent.

Answer 1

Current Market Price of the Bond

The Current 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

Annual Coupon Amount = $110 [$1,000 x 11%]

Annual Yield to Maturity = 12%

Maturity Period = 10 Years

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

= $110[PVIFA 12%, 10 Years] + $1,000[PVIF 12%, 10 Years]

= [$110 x 5.65022] + [$1,000 x 0.32197]

= $621.53 + $321.97

= $943.50

“Therefore, the Current Market Price of the Bond will be $943.50”

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.