Lance Whittingham IV specializes in buying deep discount bonds. These represent

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 5 percent annual interest and has 14 years remaining to maturity. The current yield to maturity on similar bonds is 15 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 the li?31?1 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 increases by

Explanation / Answer

a). Current price of bond:-
Present Value of Face value of bond = $1000 * PVF 15% 14 Years.
= $1000 * 0.1413 = $141.3

Present value of Interest payments = $50 * PVAF 15% 14 years
= $50 * 5.7244 = $286.22

Current Price of bond = $286.22 + $141.3 = $427.52

b). Price inceases at maturity :-
Maturity value = $1000
Current Price = $427.52
Price Increase = $572.48
Percentage increase = $572.48 / $427.52 = 133.91%

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