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Debora [2.8K]
3 years ago
10

Grossnickle Corporation issues 20-year, noncallable, 7.1% annual coupon bonds at their par value of $1,000 one year ago. Today,

the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity
Business
1 answer:
8_murik_8 [283]3 years ago
7 0

Answer:

Price of bond= $1,185.72

Explanation:

<em>The price of a bond is the present value (PV) of the future cash inflows expected from the bond discounted using the yield to maturity. </em>

These cash flows include interest payment and redemption value

The price of the bond can be calculated as follows:

Step 1

PV of interest payment

annual coupon rate = 7.1%

Annual Interest payment =( 7.1%×$1000)= $71

Annual yield = = 5.5%

PV of interest payment  

= A ×(1- (1+r)^(-n))/r

A- interest payment, r- yield - 5.5%, n- no of periods -19 periods

= 71× (1-(1.055)^(-19))/0.055)

= 71× 11.60765352

= 824.143

Step 2  

PV of redemption value (RV)

PV = RV × (1+r)^(-n)

RV - redemption value- $1000, n- 19, r- 5.5%  

= 1,000 × (1+0.055)^(-19)

= 361.579

Step 3

Price of bond = PV of interest payment + PV of RV

$824.143 +  $361.579

Price of bond= $1,185.72

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