Katie Pairy Fruits Inc. has a $1,800, 19-year bond outstanding with a nominal yi
ID: 2721040 • Letter: K
Question
Katie Pairy Fruits Inc. has a $1,800, 19-year bond outstanding with a nominal yield of 15 percent (coupon equals 15% × $1,800 = $270 per year). Assume that the current market-required interest rate on similar bonds is now only 12 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the current price of the bond. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) Current price of the bond $ b. Find the present value of 3 percent × $1,800 (or $54) for 19 years at 12 percent. The $54 is assumed to be an annual payment. Add this value to $1,800. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) Present value $
Explanation / Answer
Kate Pairy Fruits Inc. Given ; Bond price 1,800 Annual Interest @15%= 270 Market Rate = 12% Bond Maturity in years 19 Current Bond Price Calculation Year Cash flow from Interest +Maturity Value PV factor @12% PV of Cash flows= Cash flows*PV factor 1 270 0.893 241 2 270 0.797 215 3 270 0.712 192 4 270 0.636 172 5 270 0.567 153 6 270 0.507 137 7 270 0.452 122 8 270 0.404 109 9 270 0.361 97 10 270 0.322 87 11 270 0.287 78 12 270 0.257 69 13 270 0.229 62 14 270 0.205 55 15 270 0.183 49 16 270 0.163 44 17 270 0.146 39 18 270 0.130 35 19 1,270 0.116 147 Total 2,104.87 So Current Bond Price is $2,104.87
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