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Several years ago, BronkHorst issued 14% bonds at a price of $920. The bonds currently have a 13% yield to maturity and have 6 years to maturity. What is the current price of the bonds?

User YLombardi
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Final answer:

The current price of the bonds can be found by discounting the bond's future cash flows, which consist of annual interest payments and the face value repayment at maturity, at the bond's yield to maturity rate of 13%. This involves using the present value formulas for annuities and a single sum. A financial calculator or specialized software is necessary for precise calculations.

Step-by-step explanation:

The current price of BronkHorst's 14% bonds, which have a 13% yield to maturity and 6 years to maturity, can be determined through the process of discounting the expected future cash flows, which include annual interest payments and the face value repayment at maturity, at the bond's yield to maturity rate.

For this bond with a 14% coupon, the annual interest payment would be 14% of the $1,000 face value, equating to $140 per year. Given that the yield to maturity is 13%, these payments along with the face value at maturity need to be discounted by this rate. The price of the bond will be equal to the present value of these future cash flows.

The calculation would require the use of the present value formula for annuities, applied to the interest payments, and the present value formula for a single sum, applied to the face value repayment. As the exact price depends on the specific formulas and mathematics applied, a financial calculator or software designed for bond pricing would typically be used to perform this calculation accurately.

User MrCheese
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