Twenty-five-year B-rated bonds of Parker Optical Company were initially issued a
ID: 2743090 • Letter: T
Question
Twenty-five-year B-rated bonds of Parker Optical Company were initially issued at a 12 percent yield. After 10 years the bonds have been upgraded to Aa2. Such bonds are currently yielding 10 percent to maturity. Use Table 16-3 on Page 498 to determine the price of the bonds with 15 years remaining to maturity. (You do not need the bond ratings to enter the table, just use the basic facts of the problem).
Years to Maturity 8% 10% 12% 14% 16%
1 $1,038.16 $1,018.54 $1,000 $981.48 $963.98
15 $1,345.52 $1,153.32 $1,000 $875.54 $774.48
25 $1,429.92 $1,182.36 $1,000 $862.06 $754.98
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Explanation / Answer
Par Value of Bond = $1,000
Remaining life of bond = 20 years
No. of Coupon Payment during the remaining life of bond = 20 x 2 = 40
Coupon Rate = 12% annually or 6% semi annually
Semi-Annual Coupon Interest = $1,000 x 12% x 1/2 = $60
Current Yield to Maturity = 8% annually or 4% semiannually
Price of the bond = Semi-Annual Coupon Interest x PVIFA (4%, 40) + Maturity Value x PVIF (4%, 40)
= ($60 x 19.793) + ($1,000 x 0.208)
= $1,187.58 + $208
= $1,395.58
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