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Big House Nursery Inc. has issued 20 - year face value, annual coupon bonds, with a yield to
maturity of . The current price of the bond is
A.
B.
C.
D. There is not enough information to answer this question.

Ask by Mejia Hodgson. in the United States
Jan 24,2025

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The current price of the bond is $829.73.

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The Deep Dive

To find the current price of the bond, we can use the present value formula for bonds. The price of the bond is the present value of the future cash flows, including annual coupon payments and the face value at maturity.
The annual coupon payment is of , which equals . Since the bond has a yield to maturity of , we need to discount these cash flows at this rate.
Using the formula for the price:
Where:
= price of the bond
= annual coupon payment ($80)
= yield to maturity (0.10)
= number of years to maturity (20)
= face value of the bond ($1,000)
Plugging in the values, we get:
Calculating those components gives us a bond price of approximately . Therefore, the answer is C. .
Note: Pricing bonds can often lead to confusion, especially when trying to gauge the relationship between the coupon rate and yield to maturity. Just remember: if the yield is higher than the coupon rate, the bond will be priced at a discount to par value, as we saw here!

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