Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 12 percent

Question

Kilgore Natural Gas 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 10 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. ni and financial calculator me Compute the price of the bonds for these maturity dates: (Do not round intermediate calculations. Round your final answers to 2 decimal places. Assume interest payments are annual.) Bond Price a. 40 years b. 25 years c. 6 year

Explanation / Answer

Solution: Maturity Value $1000 Interest rate 12% (1000*12%) =$120 Yield to maturity 10% a) For 40 Years Maturity Using PV Function in excel we will calculate the Current Price of bond PV(10%,40,120,1000) $1195.58 Appendix D Present Value of Interest Payments 1/1.10^1 0.909090909 1/1.10^2 0.826446281 1/1.10^3 0.751314801 1/1.10^4 0.683013455 1/1.10^5 0.620921323 1/1.10^6 0.56447393 4.35526070 1/1.10^7 0.513158118 1/1.10^8 0.46650738 1/1.10^9 0.424097618 1/1.10^10 0.385543289 1/1.10^11 0.350493899 1/1.10^12 0.318630818 1/1.10^13 0.28966438 1/1.10^14 0.263331254 1/1.10^15 0.239392049 1/1.10^16 0.217629136 1/1.10^17 0.197844669 1/1.10^18 0.17985879 1/1.10^19 0.163507991 1/1.10^20 0.148643628 1/1.10^21 0.135130571 1/1.10^22 0.122845974 1/1.10^23 0.111678158 1/1.10^24 0.101525598 1/1.10^25 0.092295998 9.07704002 1/1.10^26 0.083905453 1/1.10^27 0.076277684 1/1.10^28 0.069343349 1/1.10^29 0.063039409 1/1.10^30 0.057308553 1/1.10^31 0.052098685 1/1.10^32 0.047362441 1/1.10^33 0.043056764 1/1.10^34 0.039142513 1/1.10^35 0.035584103 1/1.10^36 0.032349184 1/1.10^37 0.029408349 1/1.10^38 0.026734863 1/1.10^39 0.024304421 1/1.10^40 0.022094928 9.779050718 PV Of Interest Payments = Interest Amount * Total of Discounting Factors $120*9.779050718 $1173.49 Appendix B PV of principal Payments at Maturity PV of principal Payments at Maturity = Maturity Value * Discounting Factor of 40 th Period $1000*0.022094928 $22.09 Bond Price = $1173.49 +$22.09 Bond Price = $1195.58 b) Bond Price for 25 Years Maturity Using PV Function in excel we will calculate the Current Price of bond PV(10%,25,120,$1000) $1181.54 Appendix D PV Of Interest Payments = Interest Amount * Total of Discounting Factors of 25 Years $120*9.07704002 $1089.24 Appendix B PV of principal Payments at Maturity PV of principal Payments at Maturity = Maturity Value * Discounting Factor of 25 th Period $1000*0.092295998 $92.30 Bond Price= $1089.24 +$92.30 Bond Price = 1181.54 c) Bond Price for 6 Years Maturity Using PV Function in excel we will calculate the Current Price of bond PV(10%,6,120,$1000) $1087.11 Appendix D PV Of Interest Payments = Interest Amount * Total of Discounting Factors of 6 Years $120*4.355260699 $522.63 Appendix B PV of principal Payments at Maturity PV of principal Payments at Maturity = Maturity Value * Discounting Factor of 6 th Period $1000*0.56447393 $564.47 Bond Price = $522.63 +$564.47 Bond Price = $1087.10

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