Question

ABC Corporation issued 20-year, noncallable, 8% coupon bonds that pays coupon payment semi-annually. Par value is $1,000. Assume market interest rate on these bonds is 5.5%. What is the current price of the bonds?

A. 1300.98

B. 1267.10

C. 1377.27

D. 1271.55

Answer 1

Solution:-

ANS:- A) 1300.98

CALCULATION:-

Coupon rate= 8%

Par value of bond = $1,000

Time to mature = 20 year

Required rate of return (RR)= 5.5%

Coupon payment= Semiannually

Semiannual interest = $1000*8%*1/2= $40

Semiannual required rate of return (RR)= 5.5%*1/2 =2.75%

The current price of the bond can be calculated as follows,

Current market price

            = Semiannual interest*PVIFA(RR,N)+Maturity value*PVIF(RR ,N)

            =$40*PVIFA(2.75% , 40) +$1000*PVIF(2.75%, 40)

            =$40*24.078101+1000*0.33785222

            =$1300.98  

Please feel free to ask if you have any query in the comment section.

PVIFA calculations:-
Peroids	1/(1+2.75%)^peroids
1	0.97323601
2	0.947188331
3	0.921837791
4	0.897165734
5	0.873153999
6	0.849784914
7	0.827041278
8	0.804906354
9	0.783363848
10	0.762397906
11	0.741993095
12	0.722134399
13	0.702807201
14	0.683997276
15	0.66569078
16	0.647874238
17	0.630534538
18	0.613658918
19	0.597234957
20	0.581250566
21	0.565693982
22	0.550553754
23	0.535818738
24	0.521478091
25	0.507521256
26	0.493937962
27	0.480718211
28	0.467852274
29	0.45533068
30	0.443144214
31	0.431283907
32	0.419741029
33	0.408507084
34	0.397573804
35	0.386933143
36	0.376577268
37	0.366498558
38	0.356689594
39	0.347143157
40	0.337852221
Total	24.07810106