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Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Compute the current price of the bonds if the present yield to maturity is: (Do not round intermediate calculations. Round your final answers to 2 decimal places. Assume interest payments are annual.)

Answer :

PARRAINGO

Answer:

Price of a bond is:

= Present value of coupon payments + Present value of bond maturity value or Par

Coupon = 8% * 1,000

= $80

This is a constant payment so can be treated as an annuity.

a. Price of bond at 7% YTM.

= (80 * Present value interest factor of Annuity (PVIFA) 7%, 25 years) + 1,000 / (1 + 7%)²⁵

= (80 * 11.6536) + 184.249177

= $1,116.54

b. Price of bond at 10% YTM:

=  (80 * PVIFA 10%, 25 years) + 1,000 / (1 + 10%)²⁵

= (80 * 9.0770) + 92.295998

= $818.46

c. Price of bond at 13% YTM.

= (80 * PVIFA 13%, 25 years) + 1,000 / (1 + 13%)²⁵

= (80 * 7.3300) + 47.10195

= $633.50

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