Question

Gugenheim, Inc., has a bond outstanding with a coupon rate of 5.9 percent and annual payments. The yield to maturity is 7.1 percent and the bond matures in 15 years. What is the market price if the bond has a par value of $2,000?

a. $1,785.53
b. $1,782.78
c. $1,787.88
d. $1,780.67
e. $1,818.44

Answer 1

Bond Price = $1782.784041 rounded off to $1782.78

Option b is the correct answer

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 will be,

Coupon Payment (C) = 2000 * 0.059 = $118

Total periods (n) = 15

r or YTM = 0.071

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

Bond Price = 118 * [( 1 - (1+0.071)^-15) / 0.071] + 2000 / (1+0.071)^15

Bond Price = $1782.784041 rounded off to $1782.78