Question

Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation. His broker quotes a price of $1,180. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 12 percent annual interest payable semiannually, and has 10 years remaining until maturity. The current yield to maturity on similar bonds is 10 percent.   

a. Compute the new price of the bond. (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

New price of the bond           $  

b. Do you think the bond is overpriced?

• Yes

• No

The Vinny Cartier Company issued bonds at $1,000 per bond. The bonds had a 30-year life when issued, with semiannual payments at the then annual rate of 14 percent. This return was in line with required returns by bondholders at that point, as described below:

Real rate of return	5	%
Inflation premium	5
Risk premium	4
Total return	14	%

Assume that ten years later the inflation premium is 2 percent, the risk premium has declined to 3 percent and both are appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 20 years remaining until maturity.

Compute the new price of the bond. (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

New price of the bond           $

Answer 1

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SOLVED WITH BA II PLUS CALCULATOR