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    Price of Bonds

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    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

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    Solution Preview

    To calculate the price of the bond we need to calculate / read from tables the values of
    PVIF= Present Value Interest Factor
    PVIFA= Present Value Interest Factor for an Annuity
    Price of bond= PVIF * Redemption value + PVIFA * interest payment per period

    PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
    PVIF( n, r%)= =1/(1+r%)^n

    a) 7%

    Price of bond
    Coupon rate= 8.000%
    Face value= $1,000
    Interest payment per year= $80.00 =8.% x 1000

    Frequency= S Semi Annual

    No of years to maturity= 25
    No of Periods=n= 50 =2x25

    Discount rate annually= 7.00%
    Discount rate per period=r= 3.50% =7.%/2 Semi Annual

    Price ...

    Solution Summary

    The solution calculates the price of bonds for different yields to maturity.