Musterl Manufacturing Corporation (MMC) has an issue of 10-year, 6% annual coupon bonds outstanding. The bonds, which were originally issued 20 years ago, have a face value (FV) of $1,000, a yield to maturity (YTM) of 6%, and are noncallable. What is the current market price of MMC’s bonds? (Note: Do not round your intermediate calculations.)

Question

22-06-2021
Business

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Musterl Manufacturing Corporation (MMC) has an issue of 10-year, 6% annual coupon bonds outstanding. The bonds, which were originally issued 20 years ago, have a face value (FV) of $1,000, a yield to maturity (YTM) of 6%, and are noncallable. What is the current market price of MMC’s bonds? (Note: Do not round your intermediate calculations.)

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Parrain Parrain · Answer 1 · 2021-06-25T09:51:46+02:00

Answer: $1,000

Explanation:

When the coupon rate and the yield to maturity are the same, a bond always trades at par.

In this scenario, the bond coupon is 6% and so is the Yield to maturity. the bond price must therefore be $1,000.

If the yield to maturity was lower than the coupon rate, the bond would have been priced above $1,000 as it would be a premium bond and if the YTM had been higher than the coupon rate, the price would be lower than $1,000 as it would be a discount bond.