The bonds of CYTK, Inc. carry a 12% annual coupon, have a $1,000 face value, and mature in 5 years. Bonds of equivalent risk yield 9%. What is the market value of CYTK bonds

The market value of CYTK bonds is $1,116.69.

Explanation:

This can be calculated as follows:

Annual coupon = $1000 × 12% = $120

Annual coupon discount factor based ordinary annuity = ((1-(1/(1 + r))^n)/r)

Where;

r = rate of return of equivalent bond = 9%, or 0.09

n = number of years to maturity = 5

Therefore, we have

Annual coupon discount factor = ((1-(1/(1.09))^5)/0.09) = 3.88965126335172

PV of coupon = $120 × 3.88965126335172 = $466.76

PV of the face value of the bond = Face value ÷ (1 + r)^n = 1,000 ÷ (1 + 0.09)^5 = $649.93

Therefore, we have:

Market value of CYTK bonds = PV of coupon + PV of the face value of the bond = $466.76 + $649.93 = $1,116.69

Therefore, the market value of CYTK bonds is $1,116.69.

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