Question

The 8.5 percent bond of Fitness Center, Inc has a face value of $1,000, a maturity of 25 years, semiannual interest payments, and a yield to maturity of 12.58 percent. What is the current market price of the bond

Answer 1

Price of bond=$691.034

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

Let us assume the bond had a per value of 1000 and also redeemable at par

The value of the bond can be worked out as follows:

Step 1

Calculate the PV of interest payments

semi Annual interest payment

= 8.5% × 1000 × 1/2= 42.5

PV of interest payment

= 42.5 × (1-(1.0629)^(-25×)/0.0629)

=643.6780

Step 2

PV of redemption Value

PV = 1000 × (1-(1.0629)^(-25×2) = 47.35

Step 3

Price of bond

=643.678 + 47.356

=$691.034

Price of bond=$691.034