lance 17. Lance Whi ttingham IV specializes in buying deep discount bonds. These

Question

lance 17. Lance Whi ttingham IV specializes in buying deep discount bonds. These represent bonds at are trading at well below par value. He has his eye on a bond issued by the Leisure years a. What is the current price of the bonds? Time Corporation. The $1,000 par value bond pays 4 percent annual interest and has 18 remaining to maturity. The current yield to maturity on similar bonds is 14 percent b. By what percent will the price of the bonds increase between now and maturity? c. What is the annual compound rate of growth in the value of the bonds? (An approximate answer is acceptable.)

Explanation / Answer

Ans A Details Amount Maximum Price=Current Market Price Current Market Prize= sum total of Present Value of coupon payments and face value at end of maturity period discounted at YTM Maturity Period 18 Annual coupon rate 4% YTM 14% Face Value 1000 Current Market Price=(C*(1-(1+YTM)^-n))/1+YTM)+FV*1+YTM^-n                                  353.26 Where C=Coupon Amount PA YTM=Current YTM FV=Face Value n=No of years to maturity Ans B Details Amount/% Increase in the price of the bond 1000-353.26/353.26 183% Ans C Details Amount/% Compound Annual Growth rate=(Ending Value/Beginning Value)^(1/No of Years)-1 (1000-353.26)^(1/18)-1 43%

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