King Noodles' bonds have a 7.5% coupon rate. Interest is paid quarterly and the bonds mature in 8 years. If the discount rate is 8%, what is the price of King Noodles' bonds?

The price of King Noodles' bonds is $970.66

Explanation:

Coupon payment = 1000 x 7.5% = $75 per year = 75/4 = 18.75 per quarter

Number of periods = n = 8 years x 4 quarter each year = 32 quarter

Yield to maturity = 8% per year = 8% / 4 = 2% per quarter

Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula:

Price of the Bond = $18.75 x [ (1 - (1 + r) ^-n) / r ] + [ F / (1 + r) ^n ]

Price of the Bond = $18.75 x [ (1 - (1 + 2%) ^-32) / 2% ] + [ $1,000 / (1 + 2%) ^32 ]

Price of the Bond = $18.75 x [ (1 - (1.02) ^-32) / 0.02 ] + [ $1,000 / (1.02) ^32 ]

Price of the Bond = $440.03 + $530.63

Price of the Bond = $970.66