Exodus Limousine Company has $1,000 par value bonds outstanding at 19 percent in

Question

Exodus Limousine Company has $1,000 par value bonds outstanding at 19 percent interest. The bonds will mature in 40 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.)

Exodus Limousine Company has $1,000 par value bonds outstanding at 19 percent interest. The bonds will mature in 40 years. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Explanation / Answer

Solution :

a..Price of bond = PV OF INTEREST + PV OF REDEMTION VALUE

PV OF INTEREST = C X F X [ 1-(1+r)^-t / r ]

C= COUPON RATE = 0.19   , F = FACE VALUE = 1000, T= TIME PERIOD OCCURING OVER BOND = 40 , r = yield = 0.06 , PV = PRESENT VALUE.

= 0.19 x 1000 x [ 1 – (1 + 0.06)^-40 / 0.06 ]

=$2858.80

PV OF REDEMPTION = FACE VALUE /(1+r)^t

= 1000 / (1+0.06)^40

= 97.22

Hence Price of Bond =2858.80+97.22=2956.02                                      

b..Price if bond at 10% yield :

= 0.19 x 1000 x [ 1 – (1 + 0.10)^-40 / 0.10 ]

=1858.02

PV OF REDEMPTION = FACE VALUE /(1+r)^t

= 1000 / (1+0.10)^40

= 22.09

Hence Price of Bond =1858.02+22.09=$1880.11

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