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Johnson Motors’s bonds have 10 years remaining to maturity Interest is paid annually, the bonds have a $1000 par value and the coupon rate is 8 percent The bonds have a yield to maturity of

Johnson Motors’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon rate is 8 percent. The bonds have a yield to maturity of 9 percent. What is the current market price of these bonds? ( LG 3-2 )

( LG 3-2 )

Bond Valuation Formula Used to Calculate Fair Present Values

Most bonds pay a stated coupon rate of interest to the holders of the bonds. These bonds are called coupon bonds. The interest, or coupon, payments per year, INT, are generally constant (are fixed) over the life of the bond. 5 Thus, the fixed interest payment is essentially an annuity paid to the bond holder periodically (normally semiannually) over the life of the bond. Bonds that do not pay coupon interest are called zero-coupon bonds. For these bonds, INT is zero. The face or par value of the bond, on the other hand, is a lump sum payment received by the bond holder when the bond matures. Face value is generally set at $1,000 in the U.S. bond market.

May 18 2020 View more View Less

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