Question

Madsen Motors's bonds have 7 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 8%, and the yield to maturity is 11%. What is the bond's current market price? Round your answer to the nearest cent.

Answer 1

Bond Price $858.63

Step-by-step explanation:

We have to solve for the present value of the bond which is the coupon payment and maturity disconted at the yield to maturity:

PV of the coupon payment

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 80.000 (1,000 x 8%)

time 7

rate 0.11

`80 * (1-(1+0.11)^(-7) )/(0.11) = PV\\`

PV $376.9757

PV of the maturity

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 1,000.00

time 7.00

rate 0.11

`(1000)/((1 + 0.11)^(7) ) = PV`

PV 481.66

PV c $376.9757

PV m $481.6584

Total $858.6341