Sunset Corp. has a bond outstanding with a coupon rate of 5.94 percent and semiannual payments. The yield to maturity is 5.1 percent and the bond matures in 20 years. What is the market price if the bond has a par value of $2,000

$2,189.76

Explanation:

The price of a bond is the present value (PV) of the future cash inflows expected from the bond discounted using the yield to maturity.

The price of the bond can be calculated as follows:

Step 1

PV of interest payment

Interest payment =( 5.94%× $2000)/2

= $59.4

Semi annual yield = 5.1/2 = 2.6%

PV of interest payment

= 59.4× (1-(1.026)^(-20×2))/0.026)

= 59.4 × 24.41400537

=$ 1,450.19

Step 2

PV of  redemption value

=  2,000 × (1+0.051)^(-20)

= 2,000 × 0.369781925

=   739.56

Step 3

Price of bond  

= $1,450.19 + $739.56  

=$2,189.76

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