RCA made a coupon payment yesterday on its 6.25% bonds that mature in 11.5 years. If the required return on these bonds is 9.2% nominal annual, what should be the market price of these bonds?
To calculate the market price of RCA's 6.25% bonds, we need to use the formula for the present value of a bond. The present value of a bond is the discounted value of its future cash flows, which in this case are the coupon payments and the final principal payment.
Here's how you can calculate the market price of the bonds:
1. Determine the annual coupon payment. The coupon rate is 6.25%, and the face value of the bond is not mentioned, so we'll need more information to calculate the annual coupon payment.
2. Calculate the number of coupon payments remaining. Since the bonds mature in 11.5 years, and we are calculating the market price after a coupon payment has already been made, there are 11 remaining coupon payments.
3. Determine the required return or yield. In this case, it is given as 9.2% nominal annual.
4. Calculate the present value of each coupon payment using the required return. The present value of each future cash flow is calculated by dividing the future cash flow by (1 + r)^t, where r is the required return and t is the number of periods until the cash flow is received.
5. Calculate the present value of the final principal payment. This is calculated using the same formula as in step 4, but with the final principal payment occurring at the end of the bond's term.
6. Sum up the present values of all the cash flows (coupon payments and principal payment). This will give you the market price of the bonds.
Please provide the face value of the bonds and the frequency of coupon payments so that we can further assist you in calculating the market price.