Question

Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 7 percent annual interest and has 16 years remaining to maturity. The current yield to maturity on similar bonds is 11 percent.
  
a. What is the current price of the bonds? 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. Round your final answer to 2 decimal places. Assume interest payments are annual.)

b. By what percent will the price of the bonds increase between now and maturity?

Answer 1

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a	Present Value of Interest Payment
	PV a	A*PV ifa (n=16, i=11%
		(1000*7%)*7.379
		70*7.379
		=516.53
	Present Value of Principal Payment at maturity
	PV	FV*PV if (n=16, i=11%)
		1000*0.188
		=188
	Present Value of Interest Payment	516.53
	add: Present Value of Principal Payment at maturity	188
	Price of the bond	704.53
b	Current Price	704.53
	Price at maturity	1000
	Increase in price to matrurity (1000-704.53)	295.47
	% increase	295.47/704.53
		41.94%