Bond valuation
Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 8 percent; and the yield to maturity is 9 percent. What is the bond’s current market price?
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yes
Bond valuation
Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 8 percent; and the yield to maturity is 9 percent. What is the bond’s current market price
To calculate the current market price of a bond, you can use the present value formula. The present value represents the current value of the bond's future cash flows.
The formula for calculating the present value of a bond is:
PV = C × (1 - (1 + r)^-n) / r + M / (1 + r)^n
Where:
PV = Present Value (Market Price)
C = Coupon payment
r = Yield to maturity rate
n = Number of periods (remaining years)
M = Par value
Let's plug in the given values into the formula:
C = $1,000 × 8% = $80 (Annual coupon payment)
r = 9% (Yield to maturity rate)
n = 10 years (Remaining years)
M = $1,000 (Par value)
Using these values, we can calculate the current market price of the bond:
PV = $80 × (1 - (1 + 0.09)^-10) / 0.09 + $1,000 / (1 + 0.09)^10
Now, we can solve this equation to find the bond's current market price.