Madsen Motor's bonds have 23 years remaining to maturity. Interest is paid annually, they have $1,000 par value, the coupon interest is 9%, and the yield to maturity is 11%. What is the bond's current market price

The bond's current market price is $834.67

Explanation:

Market Value of the bond is the present value of all cash flows of the bond. These cash flows include the coupon payment and the maturity payment of the bond. Price of the bond is calculated by following formula:

According to given data

Assuming the Face value of the bond is $1,000

Coupon payment = C = $1,000 x 9% = $90 annually

Number of periods = n = 23 years =

Current Yield = r = 11% / 2  = 5.5% semiannually

Market Value of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ $1,000 / ( 1 + r )^n ]

Market Value of the Bond = $90 x [ ( 1 - ( 1 + 11% )^-23 ) / 11% ] + [ $1,000 / ( 1 + 11% )^23 ]

Market Value of the Bond = $743.98 + $90.69 = $834.67

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