Question

Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?
a. $1,142.03
b. $1,201.35
c. $1,113.48
d. $1,232.15
e. $1,171.32

Answer 1

Answer:

Explanation:

Face value (FV)=$ 1,000.00

Annual Coupon rate=7.50%

Interest per period (PMT) = $75.00 [1000*7.50%]

Number of years to maturity =19

Required rate of return per period = 5.50%

Bond pays $75 from year1 to year 18 and $1000 at maturity(year 19). So to calculate bond price we need to discount cash flows:

Bond price = 75/(1+0.055) + 75/(1+0.055)^2 + 75/(1+0.055)^3 + 75/(1+0.055)^4 + 75/(1+0.055)^5 + 75/(1+0.055)^6 + 75/(1+0.055)^7 + 75/(1+0.055)^8 + 75/(1+0.055)^9 + 75/(1+0.055)^10 + 75/(1+0.055)^11 + 75/(1+0.055)^12 + 75/(1+0.055)^13 + 75/(1+0.055)^14 + 75/(1+0.055)^15 + 75/(1+0.055)^16 + 75/(1+0.055)^17 + 75/(1+0.055)^18 + 75/(1+0.055)^19 + 1000/(1+0.055)^19 =

=