Question

Midland Oil has $1,000 par value bonds outstanding at 18 percent interest. The bonds will mature in 20 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:

15percent_________

8percent__________

11percent_________

Answer 1

Calculation of price of the bond when present yield to maturity is 15%:

Particulars	Cash flows (1)	Discount rate @15%(2)	Period	Discounted cash flows (3) (1*2)
Interest	1,000*18%=180	6.259	1-20	1126.62
Principal	1,000	1/(1.15)^20=0.0611	20	61.10
		Price		1187.72

When yield to maturity is 8%:

Particulars	Period	Cash flows (1)	Discount rate @8% (2)	Discounted Cash flows (3) (1*2)
Interest	1-20	180	9.8181	1767.258
Principal	20	1,000	1/(1.08)^20=0.2145	214.5
			Price	1981.758

When yield to maturity is 11%:

Particulars	Period	Cash flow (1)	Discount rate @11% (2)	Discounted cash flows (3) (1*2)
Interest	1-20	180	7.963	1433.34
Principal	20	1000	1/(1.11)^20=0.1240	124
			Price	1557.34