Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 14 perce
ID: 2717511 • Letter: E
Question
Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 14 percent annual interest. The current yield to maturity on such bonds in the market is 13 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Compute the price of the bonds for the maturity dates: (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)
Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 14 percent annual interest. The current yield to maturity on such bonds in the market is 13 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Explanation / Answer
Answer
30 years to maturity
Present Value of Interest Payments
PV A = A × PV IFA (n = 30, i = 13%)
PV A = $140 × 7.4957 = $1,049.398
PV = FV × PV IF (n = 30, i = 13%)
PV = $1,000 × 0.02556505 = $25.57
Total Present Value
Present Value of Interest Payments $1,049.40
Present Value of Principal Payment $25.57
Total Present Value or Price of the Bond $1,074.96
b. 19 years
Present Value of Interest Payments
PV A = A × PV IFA (n = 19, i = 13%)
PV A = $140 × 6.9380= $971.32
PV = FV × PV IF (n = 19, i = 13%)
PV = $1,000 × 0.09806399= $98.06
Total Present Value
Present Value of Interest Payments $971.32
Present Value of Principal Payment $98.06
Total Present Value or Price of the Bond $1,069.38
c. 5 years
Present Value of Interest Payments
PV A = A × PV IFA (n = 5, i = 13%)
PV A = $140 × 3.5172= $492.41
PV = FV × PV IF (n = 5, i = 13%)
PV = $1,000 × 0.054275994= $542.76
Total Present Value
Present Value of Interest Payments $1035.17
Present Value of Principal Payment $98.06
Total Present Value or Price of the Bond $1,069.38
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