Question

Exodus Limousine Company has $1,000 par value bonds outstanding at 20 percent interest. The bonds will mature in 50 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 percent yield to maturity is: (Do not round intermediate calculations. Round your final answers to 2 decimal places. Assume interest payments are annual.)

a. 5 percent bond price -

b. 9 percent bond price -

Answer 1

Solution b- If the interest rate is 5%

Bond price will be equal to the present value of all future interest payments and redemption price
Redemption price	$1,000.00
Year	50
Interest rate	5%
PV of redemption price=	1000/(1+5%)^50
PV of redemption price=	$     87.20
PV of annuity
P = PMT x (((1-(1 + r) ^- n)) / r)
Where:
P = the present value of an annuity stream	P
PMT = the dollar amount of each annuity payment	$   200.00	1000*20%
r = the effective interest rate (also known as the discount rate)	5%
n = the number of periods in which payments will be made	50
PV of interest payments=	PMT x (((1-(1 + r) ^- n)) / r)
PV of interest payments=	200*(((1-(1 + 5%) ^- 50)) / 5%)
PV of interest payments=	$3,651.19
So bond price=	3651.19+87.20
So bond price=	$3,738.39

Solution b- If the interest rate is 9%

The bond price will be equal to the present value of all future interest payments and redemption price
Redemption price	$1,000.00
Year	50
Interest rate	9%
PV of redemption price=	1000/(1+9%)^50
PV of redemption price=	$     13.45
PV of annuity
P = PMT x (((1-(1 + r) ^- n)) / r)
Where:
P = the present value of an annuity stream	P
PMT = the dollar amount of each annuity payment	$   200.00
r = the effective interest rate (also known as the discount rate)	9%
n = the number of periods in which payments will be made	50
PV of interest payments=	PMT x (((1-(1 + r) ^- n)) / r)
PV of interest payments=	200*(((1-(1 + 9%) ^- 50)) / 9%)
PV of interest payments=	$2,192.34
So bond price=	2192.34+13.45
So bond price=	$2,205.79