Question

Madsen Motors's bonds have 11 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 9%; and the yield to maturity is 5%. What is the bond's current market price? Round your answer to the nearest cent.

Answer 1

Face Value = $1000

Time to maturity = 10 years

YTM = 5%

Annual coupon rate = 9%

Annual coupon payment = 9%*1000 = 90

Method 1: Price calculation using ba ii plus calculator

Input the following data in ba ii plus calculator

N = 11

I/Y = 5

PMT = 90

FV = 1000

CPT -> PV [Press CPT and then press PV]

We get, PV = -1332.256569

Price of the bond = 1332.26 (Rounded to the nearest cent)

Method 2: Price calculation using Excel

We can compute the price of the bond using PV function in Excel as shown below:

=PV(5%,11,90,1000) = -1332.26

fx =PV(5%, 11,90,1000) RATE 5% NPER PMT FV Price of the bond 11 90 1000 -1,332.26

Answer -> Current market price of the bond ($) = 1332.26