Exodus Limousine Company has $1,000 par value bonds outstanding at 20 percent in

Question

Exodus Limousine Company has $1,000 par value bonds outstanding at 20 percent interest. The bonds will mature in 50 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.) Bond Price a. 5 percent b. 9 percent

Explanation / Answer

Annual coupon=$1000*20%=$200

1.Current price=Annual coupon*Present value of annuity factor(5%,50)+$1000*Present value of discounting factor(5%,50)

=$200*18.25592546+$1000*0.087203726

=$3738.39(Approx)

NOTE:

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$200[1-(1.05)^-50]/0.05

=$200*18.25592546

Present value of discounting factor=$1000/1.05^50

=$1000*0.087203726

2.Current price=Annual coupon*Present value of annuity factor(9%,50)+$1000*Present value of discounting factor(9%,50)

=$200*10.9616829+$1000*0.013448538

=$2205.79(Approx)

NOTE:

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$200[1-(1.05)^-50]/0.05

=$200*10.9616829

Present value of discounting factor=$1000/1.05^50

=$1000*0.013448538

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