One year ago lerner and Luckmann Co issued 15year noncallabl

One year ago lerner and Luckmann Co. issued 15-year, noncallable, 8.4% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity? Select the correct answer a. $1,265.74 b. $1,268.83 c. $1,275.01 d.$1,271.92 e. $1,278.10

Solution

Answer is $1,278.10

Par Value = $1,000

Annual Coupon Rate = 8.4%
Annual Coupon = 8.4% * $1,000
Annual Coupon = $84

Time to Maturity = 14 years
Market Interest Rate = 5.5%

Current Price = $84 * PVIFA(5.5%, 14) + $1,000 * PVIF(5.5%, 14)
Current Price = $84 * (1 - (1/1.055)^14) / 0.055 + $1,000 / 1.055^14
Current Price = $1,278.10

So, current price of the bond is $1,278.10