Question

Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 13 percent annual interest. The current yield to maturity on such bonds in the market is 13 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Compute the price of the bonds for the maturity dates: (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)

	Bond Price a. 30 years b. 20 years c. 2 years

Answer 1

a.Information provided:

Par value= future value= $1,000

Yield to maturity= 13%

Coupon rate= 13%

Coupon payment= 0.13*1,000= $130

Time= 30 years

The current price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

I/Y= 13

PMT= 130

N= 30

Press the CPT key and PV to compute the present value.

The value obtained is 1,000.

Therefore, the price of the bond is $1,000.

b.Information provided:

Par value= future value= $1,000

Yield to maturity= 13%

Coupon rate= 13%

Coupon payment= 0.13*1,000= $130

Time= 20 years

The current price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

I/Y= 13

PMT= 130

N= 20

Press the CPT key and PV to compute the present value.

The value obtained is 1,000.

Therefore, the price of the bond is $1,000.

c.Information provided:

Par value= future value= $1,000

Yield to maturity= 13%

Coupon rate= 13%

Coupon payment= 0.13*1,000= $130

Time= 2 years

The current price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

I/Y= 13

PMT= 130

N= 2

Press the CPT key and PV to compute the present value.

The value obtained is 1,000.

Therefore, the price of the bond is $1,000.

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