Question

Lincoln Park Co. has a bond outstanding with a coupon rate of 5.72 percent and semiannual payments. The yield to maturity is 6.9 percent and the bond matures in 19 years. What is the market price if the bond has a par value of $2,000?

a. $1,876.09
b. $1,880.53
c. $1,878.06
d. $1,912.67

Answer 1

The correct answer is $ 1,767.

(Please note that options given in the question are in correct)

Step-by-step explanation:

The market value of bond can be calculated by discounting all future cash inflows using yield to maturity rate i.e. 6.9%. The detail calculation is given below.

Market Value = Redemption value * discount factor + coupon payment * annuity factor

MV = 2,000 * 0.283 + 57.2 * 20.997

MV = $ 1,767

*Annuity factor = (1 - (1+i)^n)/i (i=6.9%/2 and n=19*2 =38)