Lance Whittingham IV specializes in buying deep discount bonds. These represent

Question

Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 8 percent annual interest and has 17 years remaining to maturity. The current yield to maturity on similar bonds is 12 percent.
  
a. What is the current price of the bonds? Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)
  

Current Price of Bond _________

b. By what percent will the price of the bonds increase between now and maturity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

Price increases by _________

Explanation / Answer

PV of annuity for making pthly payment P = PMT x (((1-(1 + r) ^- n)) / i) Where: P = the present value of an annuity stream PMT = the dollar amount of each annuity payment r = the effective interest rate (also known as the discount rate) i=nominal Interest rate n = the number of periods in which payments will be made Annual interest payment 8.00% Years               17 YTM 12% Par Value 1000 Annual interest 80 Present value =80*(((1-(1 +12%) ^-17)) /12%) Present value 570 PV of redemption price =1000/(1+12%)^17            146 total PV is the price of bond      715.21 Price increase =(1000-715.21)/715.21 39.82%

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