Question

A $13,969 par value bond whose coupon rate is 4.4% is purchased. If the investment represents a current yield of 3.2%, compute the bond's market price at the time of the purchase.

Answer 1

We can compute the Bond's market price with current yield formula:

$\textup{Current yield} = \frac{\textup{Annual Coupon}}{\textup{Current Price of Bond}}$

$\textup{Current Price of Bond} = \frac{\textup{Annual Coupon}}{\textup{Current yield}}$

Putting the values:

$\textup{Current Price of Bond} = \frac{\textup{0.044*13,969}}{\textup{0.032}}$

$\textup{Current Price of Bond} = \frac{\textup{614.636}}{\textup{0.032}}$

$\bg_green \large \textup{Current Price of Bond} = \$19,207.375$

Thus, Market Price of Bond is $19,207.38

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.