Save&Ex; value: 10.00 points Midland Oil has $1,000 par value bonds outstanding

Question

Save&Ex; value: 10.00 points 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 approxima 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: (Do not round intermediate calculations. Round your final answers to 2 decimal pla Assume interest payments are annual.) Bond Price a. 15 percent b. 8 percent c. 11 percent Hints References eBook & Resources Hint#1 Check my work

Explanation / Answer

a. Current Price at Yield to maturity is 15% $ 1,187.78 Working: Current Price of bond is the present value of cash flow from bond. Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.15)^-20)/0.15 i 15% =         6.2593 n 20 Present Value of 1 = (1+0.15)^-20 =         0.0611 Coupon Interest = Par Value x Coupon Rate = $       1,000 x 18% = $           180 Present Value of coupon interest $           180 x      6.2593 = $ 1,126.68 Present value of Par Value $       1,000 x      0.0611 = $       61.10 Current Price of Bond $ 1,187.78 b. Current Price at Yield to maturity is 8% $ 1,981.81 Working: Current Price of bond is the present value of cash flow from bond. Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.08)^-20)/0.08 i 8% =         9.8181 n 20 Present Value of 1 = (1+0.08)^-20 =         0.2145 Coupon Interest = Par Value x Coupon Rate = $       1,000 x 18% = $           180 Present Value of coupon interest $           180 x      9.8181 = $ 1,767.27 Present value of Par Value $       1,000 x      0.2145 = $     214.55 Current Price of Bond $ 1,981.81 c. Current Price at Yield to maturity is 11% $ 1,557.43 Working: Current Price of bond is the present value of cash flow from bond. Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.11)^-20)/0.11 i 11% =         7.9633 n 20 Present Value of 1 = (1+0.11)^-20 =         0.1240 Coupon Interest = Par Value x Coupon Rate = $       1,000 x 18% = $           180 Present Value of coupon interest $           180 x      7.9633 = $ 1,433.40 Present value of Par Value $       1,000 x      0.1240 = $     124.03 Current Price of Bond $ 1,557.43

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