Ten years ago Pancake House Inc.issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each.Since then,interest rates in general have risen and the yield to maturity on the Bacon bonds is now 9%.Given this information,what is the price today for such a bond?

Question

Quizplus · Accepted Answer

The price of a bond is the present value of its future cash flows, which include the annual coupon payments and the face value at maturity. When the market interest rate (yield to maturity) rises above the coupon rate, the bond's price falls below its face value to offer a return that is competitive with the new market rates. In this case, with the yield to maturity at 9% and the coupon rate at 8%, the bond's price would be less than its face value of $1,000. Using the bond pricing formula, the correct price is $919.39, which accounts for the present value of the remaining coupon payments and the discounted face value at maturity.

Ten Years Ago Pancake House Inc