Question

"Madsen Motors's bonds have 9 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 11%, and the yield to maturity is 14%. What is the bond's current market price? Round your answer to the nearest cent."

Answer 1

Bond Price = $851.6088449 rounded off to $851.61

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) = 1,000 * 0.11 = $110

Total periods (n) = 9

r or YTM = 0.14

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

Bond Price = 110 * [( 1 - (1+0.14)^-9) / 0.14] + 1000 / (1+0.14)^9

Bond Price = $851.6088449 rounded off to $851.61