The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and...
The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the yield to maturity for these bonds is 7.22%. What is the market price per bond?
$986.81 Please show work
Homework Answers
| Price of bond is the present value of cash flows from bond. | |||||||||||||
| Semi annual coupon interest | = | Face Value * Semi annual coupon rate | |||||||||||
| = | $ 1,000 | * | 3.50% | ||||||||||
| = | $ 35 | ||||||||||||
| Present value of annuity of 1 | = | (1-(1+i)^-n)/i | Where, | ||||||||||
| = | (1-(1+0.0361)^-16)/0.0361 | i | 7.22%/2 | = | 0.0361 | ||||||||
| = | 11.994816 | n | 8*2 | = | 16 | ||||||||
| Present value of 1 | = | (1+i)^-n | |||||||||||
| = | (1+0.0361)^-16 | ||||||||||||
| = | 0.5669872 | ||||||||||||
| Present Value of coupon interest | = | Semi annual coupon interest*Present value of annuity of 1 | |||||||||||
| = | $ 35 | * | 11.99482 | ||||||||||
| = | $ 419.82 | ||||||||||||
| Present value of face Value | = | Face Value * Present value of 1 | |||||||||||
| = | $ 1,000 | * | 0.566987 | ||||||||||
| = | $ 566.99 | ||||||||||||
| Present Value of Cash flows | = | Present Value of coupon interest | + | Present value of face Value | |||||||||
| = | $ 419.82 | + | $ 566.99 | ||||||||||
| = | $ 986.81 | ||||||||||||
| Present value of cash flows from bond is $ 986.81.So, Price of Bond is $ 986.81 | |||||||||||||
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