Problem 10-2 Bond value [LO3] Midland Oil has $1,000 par value bonds outstanding

Question

Problem 10-2 Bond value [LO3] Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is: a) 7 percent b) 10 percent c) 13 percent Round your final answers to 2 decimal places. Assume interest payments are annual.) Input variables: $1,000 0.08 Par value Coupon rate Number of years a. Yield to maturity b.Yield to maturity c.Yield to maturity 25 years 0.07 0.10 0.13 Solution and Explanation: Price b. Price C. Price

Explanation / Answer

Current Price of Bonds = Present Value of all future cash flows

i.e. Present Value of All Interests + Face Value

=80*PVAF(7%, 25 years) + 1000*PVF(7%, 25 years)

=80*11.654 +1000*0.184

=1,116.32

b.YTM=10%

Current Price of Bonds = 80*PVAF(10%, 25 years) + 1000*PVF(10%, 25 years)

=80*9.077 +1000*0.092

=818.16

c.YTM=13%

Current Price of Bonds = 80*PVAF(13%, 25 years) + 1000*PVF(13%, 25 years)

=80*7.330 +1000*0.047

633.4

As YTM increases, Price of Bond Decreases

a.YTM is less than Coupon Rate, Bond price is more than face value

b.&c.YTM is more than the coupon rate, bond price is less than the face value

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.