Question

Popular motors bonds have 8 years remaining to maturity. Interest is paid annually, they have $1000 par value, the coupon interest rate is 5% and the yield to maturity is 7%. What is the bonds current market price

Answer 1

The market price will be $880.57

Step-by-step explanation:

Interest amount for each year till 8 years will be $50 (1000*5%). Interest rate will be applied on par value. The cashflows of 8 years on account of interest and principal amount of $1000 would be discounted at 7%.

Working:

P.V of interest by using annuity formula:

$50 * (1-(1+7%)^-8)/7% = $298.57

P.V of principal amount : $1000 * (1+7%)^-8 = $582

Current price of bond = $298.57 + $582 = $880.57