Question

Katie Pairy Fruits Inc. has a $3,300, 12-year bond outstanding with a nominal yield of 18 percent (coupon equals 18% × $3,300 = $594 per year). Assume that the current market required interest rate on similar bonds is now only 12 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the current price of the bond. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) b. Find the present value of 6 percent × $3,300 (or $198) for 12 years at 12 percent. The $198 is assumed to be an annual payment. Add this value to $3,300. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)

Answer 1

Answer A.

Face Value = $3,300
Annual Coupon = $594
Time to Maturity = 12 years
Interest Rate = 12%

Using table values:

Price of Bond = $594 * PVA of $1 (12%, 12) + $3,300 * PV of $1 (12%, 12)
Price of Bond = $594 * 6.19437 + $3,300 * 0.25668
Price of Bond = $4,526.50

Using formula:

Price of Bond = $594 * (1 - (1/1.12)^12) / 0.12 + $3,300 / 1.12^12
Price of Bond = $4,526.49

Answer B.

Present Value of $198 for 12 years = $198 * (1 - (1/1.12)^12) / 0.12
Present Value of $198 for 12 years = $1,226.49

Price of Bond = $1,226.49 + $3,300
Price of Bond = $4,526.49