Question

Lincoln Park Co. has a bond outstanding with a coupon rate of 5.96 percent and semiannual payments. The yield to maturity is 5.3 percent and the bond matures in 19 years. What is the market price if the bond has a par value of $2,000

Answer 1

Answer:

Market price of bond = $2,166.30

Explanation:

Step 1

Calculate the interest payment per 6 months and number of periods

Interest rate per 6 months = (5.96% × 2000)/2 = 59.6

Number of periods = 19 × 2 = 38 periods

Step 2

Calculate  the Present Value (PV) of the interest payment

Yield per six month = 5.3%/2 = 2.65%

PV =  A × (1+r)^(-n)

=   59.6× ( (1.0265)^(-38)/0.0265 )

=    59.6 ×23.7685

=  $1,416.60

Step 3

Calculate the PV of the Redemption Value (RV)

PV = RV × (1+r)^(-n)

    = 2000 ×  (1.053)^(-19)

    = 749.705925

Market price of Bond =1,416.60 +  749.70

    = $2,166.30

Market price of bond = $2,166.30