Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 12 perce

Question

Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 12 percent annual interest. The current yield to maturity on such bonds in the market is 8 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.)
  

a. 30years

b. 20 years

c. 2 years

Explanation / Answer

Par Value = $1,000
Annual Dividend = 12%*$1,000 = $120
YTM = 8%

Answer a.

Time to Maturity = 30 years

Price of Bond = $120 * PVA of $1 (8%, 30) + $1,000 * PV of $1 (8%, 30)
Price of Bond = $120 * 11.25778 + $1,000 * 0.09938
Price of Bond = $1,450.31

Answer b.

Time to Maturity = 20 years

Price of Bond = $120 * PVA of $1 (8%, 20) + $1,000 * PV of $1 (8%, 20)
Price of Bond = $120 * 9.81815 + $1,000 * 0.21455
Price of Bond = $1,392.73

Answer c.

Time to Maturity = 2 years

Price of Bond = $120 * PVA of $1 (8%, 2) + $1,000 * PV of $1 (8%, 2)
Price of Bond = $120 * 1.78326 + $1,000 * 0.85734
Price of Bond = $1,071.33

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