Exodus Limousine Company has $1,000 par value bonds outstanding at 20 percent in

Question

Exodus Limousine Company has $1,000 par value bonds outstanding at 20 percent interest. The bonds will mature in 50 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 percent yield to maturity is: (Do not round intermediate calculations. Round your final answers to 2 decimal places. Assume interest payments are annual.) Bond Price a. 5 percent b. 9 percent

Explanation / Answer

Solution-

Par value of bonds = $1000

Rate of interest =20%

Amount of interest =1000*20%= $200

Maturity period= 50 years

Current price of bonds = Interest *(PVAF, rate, period ) + Par value / Redemption value *(PVF, rate, period )

Calculation of current price of bonds if the yield to maturity is 5%

Current price = 200*(PVAF,5%,50)+1000*(PVF,5%,50)

Current price = 200*18.256 + 1000*0.087=$3738.20

Calculation of current price of bonds if the yield to maturity is 9%

Current price = 200*(PVAF,9%,50)+ 1000*(PVF,9%,50)

Current price = 200* 10.962 + 1000* 0.013= $2205.40

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