Question

Madsen Motors's bonds have 21 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 10.5%; and the yield to maturity is 9%. What is the bond's current market price? Round your answer to the nearest cent.

Answer 1

To calculate the bond's current market price, we need to use the present value formula. The formula for the present value of a bond is: PV = C/(1 + r) + C/(1 + r)^2 + ... + C/(1 + r)^n + F/(1 + r)^n, where PV is the present value, C is the coupon payment, r is the yield to maturity, n is the number of years, and F is the face value.

Step-by-step explanation:

To calculate the bond's current market price, we need to use the present value formula. The formula for the present value of a bond is: PV = C/(1 + r) + C/(1 + r)^2 + ... + C/(1 + r)^n + F/(1 + r)^n, where PV is the present value, C is the coupon payment, r is the yield to maturity, n is the number of years, and F is the face value.

In this case, the coupon payment is $1,000 * 10.5% = $105, the yield to maturity is 9%, and the number of years is 21. Plugging these values into the formula, we get:

PV = $105/(1 + 0.09) + $105/(1 + 0.09)^2 + ... + $105/(1 + 0.09)^21 + $1,000/(1 + 0.09)^21

Solving this equation will give us the bond's current market price, which should be rounded to the nearest cent.