Bond Valuation with Annual Payments
Jackson Corporation's bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 10%. What is the current market price of these bonds? Round your answer to the nearest cent.
ANSWER = 1 | ||||||
Step 1 : Calculation of Annual Coupon Payments | ||||||
Par value of the bond issued is = | $ 1,000.00 | |||||
Annual Coupon % | 8.00% | |||||
Annual Coupon Amount | $ 80.00 | |||||
Step 2: Calculate number of years to Maturity | ||||||
Number of years to maturity = 5 years | ||||||
Step 3 : Yield to Maturity = 10%, So discount rate = 10% | ||||||
PVF = 1 / Discount rate = 1/ 1.10 | ||||||
Result of above will again divide by 1.10 , repeat this till last period | ||||||
CALCULATION OF CURRENT MARKET PRICE OF THE BOND OR PURCHASE PRICE | ||||||
Years | Interest | Amount | PVF of $ 1 @ 10% | PresentValue | ||
1 | Interest | $ 80.00 | 0.9091 | $ 72.73 | ||
2 | Interest | $ 80.00 | 0.8264 | $ 66.12 | ||
3 | Interest | $ 80.00 | 0.7513 | $ 60.11 | ||
4 | Interest | $ 80.00 | 0.6830 | $ 54.64 | ||
5 | Interest | $ 80.00 | 0.6209 | $ 49.67 | ||
5 | Bond Value | $ 1,000.00 | 0.6209 | $ 620.92 | ||
Total | $ 924.18 | |||||
Current price of the Bond = | $ 924.18 | |||||
Answer = $ 924.18 | ||||||
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