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 6 percent annual interest and has 15 years remaining to maturity. The current yield to maturity on similar bonds is 14 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.)
current price of bond
b. By what percent will the price of the bonds increase between now and maturity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
price increase by
You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 11 percent, which is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 10 years to maturity. 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 price of the bonds based on semiannual analysis. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
bond price
b. With 5 years to maturity, if yield to maturity goes down substantially to 10 percent, what will be the new price of the bonds? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
new bond price
| a) | ||
| Current Price of Bond | ||
| Present Value of Interest Payments = Coupon Payment × PVIFA (n = 15, i = 14%) | ||
| Present Value of Interest Payments = ($1000 x 6% × PVIFA (n = 15, i = 14%) | ||
| Present Value of Interest Payments = ($ 60 × 6.1422 | $368.53 | |
| Present Value of Principal Payment at Maturity = FV x PV(n = 15, i=14%) | ||
| Present Value of Principal Payment at Maturity = $1000 x .1401 | $140.096482 | |
| Current Price of Bond | $508.63 | |
| FV | $1,000.00 | |
| Rate | 14.00% | |
| Nper | 15 | |
| PMT | $60.00 | |
| PV= Current Price | $508.63 | |
| b) | ||
| Dollar increase = $1000 - $508.63 | $491.37 | |
| % increase = $491.37/$508.63 | 96.61% |
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