A 20-year bond pays 6% annually on a face value of $1,000. If similar bonds are currently yielding 4%, what is the market value of the bond? Use time value of money tables in Appendix B and Appendix D.
A) $1,271.40
B) $573.50
C) $770.80
D) Not enough information is given to tell.

Question

Quizplus · Accepted Answer

All else being equal, when the yield to maturity is less than the coupon/face rate, the bond will be priced above par:
PV of interest payments: 1,000 × 0.06 = $60. Using PV of annuity table, I = 4%, n = 20 years, factor 13.590 × $60 = 815.40
PV of principal: Using PV of $1 table, I = 4%, n = 20 years, factor 0.456 × $1,000 = 456.00
Total of both PV's = 815.40 + 456 = 1,271.40

A 20-Year Bond Pays 6% Annually on a Face Value