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