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 Subject: Accounting question (market price) Category: Business and Money > Accounting Asked by: steph21480-ga List Price: \$2.00 Posted: 27 Nov 2006 05:28 PST Expires: 27 Dec 2006 05:28 PST Question ID: 785899
 ```What is the market price of a \$200,000, ten-year, 12% (pays interest semi-annually) bond issue sold to yield an effective rate of 10%?```
 ```Steph21480 -- This bond pays 20 coupons of \$12,000 (12% or \$24,000 for each year) PLUS the bond redemption itself at the end of period 20. We'll set this up as a net present value (NPV) problem, with a discount of 5.0% each six months (10% per year). The NPV is the price of the bond. I've placed the NPV calculations in a spreadsheet here: NPVbond http://www.mooneyevents.com/NPVbond.xls The total value of the bond coupons is \$149,546.52, while the value of getting the principal back in 10 years is \$75,377.90. So, the market value of the bond is \$224,924.42. You'll note that the price is higher than the bond. This is because the coupon rate is above the market interest rate of 10%. Normally a corporate finance staff would try to price the bond closer to par value, but this shows how interest rate spreads work to RAISE the price of a bond. Best regards, Omnivorous-GA```
 steph21480-ga rated this answer: `Excellent researcher- very quick and helpful. A+++`