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
Use the formula given here:
http://www.financeformulas.net/Yield_to_Maturity.html
To calculate the bond's current market price, you can use the formula for bond valuation. The formula is:
P = (C / (1 + r)^1) + (C / (1 + r)^2) + ... + (C + F) / (1 + r)^n
Where:
P = Current market price
C = Annual coupon payment
r = Yield to maturity (expressed as a decimal)
F = Par value of the bond
n = Number of years remaining to maturity
In this case:
C = $1,000 * 8% = $80 (annual coupon payment)
r = 9% = 0.09 (yield to maturity as a decimal)
F = $1,000 (par value)
n = 10 (number of years remaining to maturity)
Substituting the values into the formula, we have:
P = (80 / (1 + 0.09)^1) + (80 / (1 + 0.09)^2) + ... + (80 + 1,000) / (1 + 0.09)^10
Now, let's calculate the bond's current market price using the formula:
P = (80 / 1.09^1) + (80 / 1.09^2) + ... + (80 + 1,000) / 1.09^10
Calculating each part of the sum and summing them up:
P = (73.39) + (67.36) + ... + (535.13)
After calculating each term and summing them up, the bond's current market price would be obtained.