Question

Gugenheim, Inc., has a bond outstanding with a coupon rate of 6.4 percent and annual payments. The yield to maturity is 7.6 percent and the bond matures in 20 years. What is the market price if the bond has a par value of $2,000?

Answer 1

Answer:

Price of the bond is $1,757

Explanation:

Coupon payment = 2000 x 6.4% = $128 annually

Number of periods = n = 20 years

Yield to maturity = 7.6% annually

Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula

Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]

Price of the Bond = $128 x [ ( 1 - ( 1 + 7.6% )^-20 ) / 7.6% ] + [ 2,000 / ( 1 + 7.6% )^20 ]

Price of the Bond = $128 x [ ( 1 - ( 1.076 )^-20 ) / 0.076 ] + [ 2,000 / ( 1.076 )^20 ]

Price of the Bond = $1295.03 + $462.15

Price of the Bond = $1,757.18