Question

Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 10 percent annual interest. The current yield to maturity on such bonds in the market is 12 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 these maturity dates: (Do not round intermediate calculations. Round your final answers to 2 decimal places. Assume interest payments are annual.)

		Bond Price
a.	40 years	?
b.	20 years	?
c.	5 years	?

Answer 1

a

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =40

Bond Price =∑ [(10*1000/100)/(1 + 12/100)^k]     +   1000/(1 + 12/100)^40

k=1

Bond Price = 835.12

b

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =20

Bond Price =∑ [(10*1000/100)/(1 + 12/100)^k]     +   1000/(1 + 12/100)^20

k=1

Bond Price = 850.61

c

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =5

Bond Price =∑ [(10*1000/100)/(1 + 12/100)^k]     +   1000/(1 + 12/100)^5

k=1

Bond Price = 927.9