Madsen Motorss bonds have 17 years remaining to maturity Int

Madsen Motors\'s bonds have 17 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 12%; and the yield to maturity is 10%. What is the bond\'s current market price? Round your answer to the nearest cent.

Solution

Annual coupon=$1000*12%=$120

Current price=Annual coupon*Present value of annuity factor(10%,17)+$1000*Present value of discounting factor(10%,17)

=$120*8.021553311+$1000*0.197844668

=$1160.43(Approx).

NOTE:

1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$120[1-(1.1)^-17]/0.1

=$120*[1-0.197844668]/0.1

=$120*8.021553311

2.Present value of discounting factor=$1000/(1.1)^17

=$1000*0.197844668