The market price of a $1000 face value bond is $1,059.32
What is market price?
It is determined using the current interest rate compared to the interest rate stated on the bond. The market price of the bond comprises two parts. The first part is the present value of the bond's face value. The second part is the present value of the bond's interest payment.
How to calculate market price?
Par / Face Value of the bond = $1000
Semi annual coupon payment
= par value * coupon rate * 1 / number of coupon payments per year
= $1000 * 8.5% * 1/2
= $42.5
Number of coupon payments (n)
= Years to maturity * number of coupon payments per year
= 17 * 2
= 34
Semi Annual Yield (YTM)
= yield to maturity / number of coupon payments per year
= 0.0834 / 2
= 0.0417
Now, let's calculate the current market price of bond
Price = Coupon payment *(1-(1+YTM)^-n)/YTM + Face Value / (1+YTM)^n
= 45 * [tex]\frac{(1-(1+0.0417)^{-34})}{0.0417} + \frac{1000}{(1+0.0417)^{34} }[/tex]
= 45 * [tex]\frac{(1-0.2493155798)}{0.0417} + \frac{1000}{4.010980785}[/tex]
= 45 * 18 + 249.31557981
= 810 + 249.31557981
= $1,059.32 (rounded)
So the bond's current market price of wine and roses, Inc. is $1,059.32
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