Question

On January 2, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 4%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars). $215,567 $183,777 $217,966 $200,000

Answer 1

Bond Price = $217966

Step-by-step explanation:

To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,

Coupon Payment (C) = 200000 * 0.06 * 6/12 = 6000

Total periods (n) = 5 * 2 = 10

r or YTM = 0.04 * 1/2 = 0.02 or 2%

The formula to calculate the price of the bonds today is attached.

Bond Price = 6000 * [( 1 - (1+0.02)^-10) / 0.02] + 200000 / (1+0.02)^10

Bond Price = $217966