Question

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 9.5% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

Select the correct answer.

a. $1,386.61

b. $1,392.65

c. $1,383.59

d. $1,389.63

e. $1,395.67

Answer 1

Bond's Market Value = PV of Coupon Payment + PV of Maturity Value

= [Periodic Coupon Payment * {(1 - (1 + r)^-n) / r}] + [Face Value / (1 + r)^n]

= [{9.5%*$1,000} * {(1 - (1 + 0.055)^-14) / 0.055}] + [$1,000 / {1 + 0.055}^14]

= [$95 * {0.5274 / 0.055}] + [$1,000 / 2.1161]

= [$95 * 9.5896] + $472.57

= $911.02 + $472.57 = $1,383.59

So, Option "c" is correct.