Question

Katie Pairy Fruits Inc. has a $2,000, 21-year bond outstanding with a nominal yield of 17 percent (coupon equals 17% × $2,000 = $340 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 5 percent × $2,000 (or $100) for 21 years at 12 percent. The $100 is assumed to be an annual payment. Add this value to $2,000. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)

Answer 1

1-	current price of bond	interest*PVAF at 12% for 21 period + face value*PVF at 12% for 21st year	340*7.562 +2000*.09256	2756.20
	Interest	2000*17%		340
	Face value			2000
	PVAF at 12% for 21 year period	1-(1+r)^-n/r	1-(1.12)^-21/.12	7.562
	PVF at 12% for 21st year	1/(1+r)^n	1/(1.12)^21	0.09256
2-	current price of bond	interest*PVAF at 12% for 21 period + face value*PVF at 12% for 21st year	100*7.562 +2000*.09256	941.32
	Interest	2000*5%		100
	Face value			2000
	PVAF at 12% for 21 year period	1-(1+r)^-n/r	1-(1.12)^-21/.12	7.562
	PVF at 12% for 21st year	1/(1+r)^n	1/(1.12)^21	0.09256