LU Liberty University Portal x M Homework 5 |M table 10-1 JPG (1160x 575) x C D

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LU Liberty University Portal x M Homework 5 |M table 10-1 JPG (1160x 575) x C D ezto.mheducation.com /hm.tpx Homework 5 Question 4 (of 26) 2.00 points Katie Pairy Fruits Inc. has a $2,300, 24-year bond outstanding with a nominal yield of 16 percent (coupon equals 16% x $2,300 $368 per year). Assume that the current market-required interest rate on similar bonds is now only 12 percent. Use Appendix B and AppendixD for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the current price of the bond. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) Current price of the bond 5,316.15 b. Find the present value of 4 percent x $2,300 (or $92) for 24 years at 12 percent. The $92 is assumed to be an annual payment. Add this value to $2,300. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) 867.69 Present value References eBook & Resources eBook: Valuation of Bonds Check my work instructions l help Save & Exit submit 12:11 PM 11/24/2015

Explanation / Answer

1

Calculation of Current Price of the bond:

Annual coupon payment

$           368

Term (Years )

24

Required rate of return

12%

Present value annuity factor (12%, 24 years)

      7.78432

Present value of Coupon payments = 368 * 7.78432 (A)

$ 2,864.63

Terminal value (Face value)

$        2,300

Present value factor (12%, 24 th year)

    0.065882

Present value of terminal value = 2300 *0.065882 (B)

$    151.53

Current Price of the bond (A+B)

$ 3,016.16

2

Calculation of Present value

Annual coupon payment

$              92

Term (Years )

24

Required rate of return

12%

Present value annuity factor (12%, 24 years)

      7.78432

Present value of Coupon payments = 92 * 7.78432 =

$     716.16

Add: face value

$        2,300

Present value

$ 3,016.16

1

Calculation of Current Price of the bond:

Annual coupon payment

$           368

Term (Years )

24

Required rate of return

12%

Present value annuity factor (12%, 24 years)

      7.78432

Present value of Coupon payments = 368 * 7.78432 (A)

$ 2,864.63

Terminal value (Face value)

$        2,300

Present value factor (12%, 24 th year)

    0.065882

Present value of terminal value = 2300 *0.065882 (B)

$    151.53

Current Price of the bond (A+B)

$ 3,016.16

2

Calculation of Present value

Annual coupon payment

$              92

Term (Years )

24

Required rate of return

12%

Present value annuity factor (12%, 24 years)

      7.78432

Present value of Coupon payments = 92 * 7.78432 =

$     716.16

Add: face value

$        2,300

Present value

$ 3,016.16

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