Question

Gugenheim, Inc., has a bond outstanding with a coupon rate of 5.7 percent and annual payments. The yield to maturity is 6.9 percent and the bond matures in 13 years. What is the market price if the bond has a par value of $2,000?

Answer 1

Price of bond = $1,798.27

Step-by-step explanation:

The value of the bond is the present value(PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

Value of Bond = PV of interest + PV of RV

The value of bond for Gugenheim, Inc.can be worked out as follows:

Step 1

PV of interest payments

annul interest payment

= 5.7% × 2000 = 138

annual yield = 6.9%

Total period to maturity = 13 years

PV of interest payment = 114 × (1- 069^-13)/0.069=958.19

Step 2

PV of Redemption Value

= 2,000 × (1.069)^(-13) = 840.078

Price of bond =958.196089 + 840.078 =1,798.27

Price of bond = $1,798.27