The Lone Star Company has $1,000 par value bonds outstanding at 10 percent inter

Question

The Lone Star Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 20 years. Use Appendix B and Appendix D for an approximate answer but 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 places. Assume interest payments are annual.)

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 places. Assume interest payments are annual.)

Explanation / Answer

Price of a bond is the present value of all future cash flows. The cash flows will be the maturity amount and the 20 annual interest payments. Interest amount = par value*interest rate = 1,000*10% = $100. 20 such ayments will be received from year 1 to year 20. At the end of year 20, $1,000 will be received as maturity amount. These cash flows will be discounted using the yield to maturity (YTM) rates.

a. YTM = 6%

Thus price of the bond = 100*(PVIFA 6%, 20 years) + 1,000*(PVIF 6%, 20 year)

= 100*11.470+1,000*0.3118

= 1147+311.8

= $1,458.80

b. YTM = 9%

thus price of the bond = 100*(PVIFA 9%, 20 years) + 1,000*(PVIF 9%, 20 year)

=100*9.1285 + 1,000*0.1784

= 912.85+178.4

= $1,091.25

c. YTM = 13%

Thus price of the bond = 100*(PVIFA 13%, 20 years) + 1,000*(PVIF 13%, 20 year)

= 100*7.0248+1000*0.0868

= 702.48+86.8

= 789.28

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