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The Lone Star Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds...

The Lone Star Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 18 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.)
  

a. 7 percent

b. 9 percent

c. 12 percent

Solutions

Expert Solution

a)

Coupon = 0.1 * 1000 = 100

Current price = Coupon * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n

Current price = 100 * [1 - 1 / (1 + 0.07)18] / 0.07 + 1000 / (1 + 0.07)18

Current price = 100 * 10.05909 + 295.86392

Current price = $1,301.77

Keys to use in a financial calculator:

FV 1000

PMT 100

N 18

I/Y 7

CPT PV

2)

Coupon = 0.1 * 1000 = 100

Current price = Coupon * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n

Current price = 100 * [1 - 1 / (1 + 0.09)18] / 0.09 + 1000 / (1 + 0.09)18

Current price = 100 * 8.75563 + 211.99374

Current price = $1,087.56

Keys to use in a financial calculator:

FV 1000

PMT 100

N 18

I/Y 9

CPT PV

3)

Coupon = 0.1 * 1000 = 100

Current price = Coupon * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n

Current price = 100 * [1 - 1 / (1 + 0.12)18] / 0.12 + 1000 / (1 + 0.12)18

Current price = 100 * 7.24967 + 130.03959

Current price = $855.01

Keys to use in a financial calculator:

FV 1000

PMT 100

N 18

I/Y 12

CPT PV

jeff jeffy answered 1 year ago
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