Question

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 6.7% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity

Answer 1

Bond Price = $1115.075775 rounded off to $1115.08

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 an annual bond, the coupon payment, number of periods and annual YTM or market interest rate will be,

Coupon Payment (C) = 1000 * 0.067 = $67

Total periods (n) = 14

r or YTM = 0.055 or 5.5%

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

Bond Price = 67 * [( 1 - (1+0.055)^-14) / 0.055] + 1000 / (1+0.055)^14

Bond Price = $1115.075775 rounded off to $1115.08