Question

Barry’s Steroids Company has $1,000 par value bonds outstanding at 16 percent interest. The bonds will mature in 40 years.

If the percent yield to maturity is 14 percent, what percent of the total bond value does the repayment of principal represent? Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Answer 1

Current Market Price of the Bond

The Current Market Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Par Value of the bond = $1,000

Annual Coupon Amount = $160 [$1,000 x 16%]

Yield to Maturity = 14.00%

Maturity Period = 40 Years

The Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $160[PVIFA 14.00%, 40 Years] + $1,000[PVIF 14.00%, 40 Years]

= [$160 x 7.10504] + [$1,000 x 0.00529]

= $1,136.81 + $5.29

= $1,142.10

Principal as a percentage of bond price

Principal as a percentage of bond price = [Present Value of the Par Value / Current Price of the Bond] x 100

= [$5.29 / $1,142.10] x 100

= 0.46%

“Hence, the Principal as a percentage of bond price will be 0.46%”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.