On January 2, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and Dece
mber 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 4%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars). $215,567 $183,777 $217,966 $200,000
1 answer:
Answer:
Bond Price = $217966
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 a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,
Coupon Payment (C) = 200000 * 0.06 * 6/12 = 6000
Total periods (n) = 5 * 2 = 10
r or YTM = 0.04 * 1/2 = 0.02 or 2%
The formula to calculate the price of the bonds today is attached.
Bond Price = 6000 * [( 1 - (1+0.02)^-10) / 0.02] + 200000 / (1+0.02)^10
Bond Price = $217966
You might be interested in