Question

Madsen Motors's bonds have 7 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 8%, and the yield to maturity is 11%. What is the bond's current market price? Round your answer to the nearest cent.

Answer 1

Answer:

Bond Price $858.63

Explanation:

We have to solve for the present value of the bond which is the coupon payment and maturity disconted at the yield to maturity:

PV of the coupon payment

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 80.000 (1,000 x 8%)

time 7

rate 0.11

$80 \times \frac{1-(1+0.11)^{-7} }{0.11} = PV$

PV $376.9757

PV of the maturity

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   1,000.00

time   7.00

rate  0.11

$\frac{1000}{(1 + 0.11)^{7} } = PV$  

PV   481.66

PV c $376.9757

PV m  $481.6584

Total $858.6341