Question

Jackson Corporation's bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds? Wilson Corporation's bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity?

Answer 1

To find the market price of Jackson Corporation's bonds and the yield to maturity of Wilson Corporation's bonds, we use present value calculations that consider the bonds' coupon rates, market prices, yields to maturity, and time to maturity.

Step-by-step explanation:

To calculate the current market price of Jackson Corporation's bonds with a 12-year maturity, an annual interest rate of 8%, and a yield to maturity of 9%, we use the present value formula for bonds. The formula accounts for the present value of the annuity (interest payments) and the present value of the par value (the amount that will be received at maturity). Since the bonds have a yield to maturity higher than the coupon rate, they will be sold at a discount.

For Wilson Corporation's bonds, we have the price of $850 for a bond with a 12-year maturity, a $1,000 par value, and a coupon interest rate of 10%. To determine the yield to maturity, we solve for the rate that equates the present value of the bonds' future cash flows (interest payments plus face value at maturity) to the bond's current market price of $850.