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A company has 5 percent coupon bonds on the market that have 14 years left to maturity
A company has 5 percent coupon bonds on the market that have 14 years left to maturity. The bonds make annual payments and have a par value of $1,000. If the YTM on these bonds is 7.1%, what is the current bond price? Select one: a.950.41 b.1120.30 c.1054.49 d.817.44
Expert Solution
Given that:
Time to maturity = 14 years
YTM rate = 7.1%
Par value of bond = $1000
Coupon rate = 5%
Hence coupon amount = $1000 x5%
= $ 50
We know that price of the bond= coupon per period x present value annuity factor at ytm rate for n number of maturity period + redemption value of bond x present value interest factor at ytm rate for n number of maturity periods
I.e. price of the bond = 50 x PVAF(7.1%, 14 YEARS) +1000 X PVIF (7.1%, 14 YEARS)
= 50 x8.693262 +1000 x 0.382778
= $817.44
Hence price of the bond is $817.44
Thus the correct answer is d i.e. $817.44
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